CHAPTER 1
The business world and
business management
Peet Venter
The purpose of this chapter
This chapter discusses the role of business in society and explains how a business
organisation in a market economy employs the various resources of a nation (its natural
resources, human resources, financial resources and entrepreneurship) in order to satisfy
the need for products and services. The chapter gives an overview of the prevailing
economic systems in the world and explains how the business organisation functions in a
market economy.
Learning outcomes
On completion of this chapter you should be able to:
•explain the role the business organisation plays in making available the products and
services society must have to exist and thrive
•describe the needs of society and how a business organisation satisfies those needs in
a market economy
•distinguish between the world’s three main economic systems
•explain the interface between a business organisation and a market economy
•describe the nature and purpose of business management as a science, where the
enabling factors, methods and principles of the business are studied to ensure the
efficient functioning of a business organisation
•comment on the development of business management as a science
•distinguish between and comment on the different management functions.
1.1Introduction
In a market economy, the business world can be seen as a complex system that involves
transforming resources into products and services. These products and services must
meet the needs of people in exchange for a profit. This description of business
emphasises four different elements:
•human activities
•production
•exchange
•profit.
These elements are discussed in detail in section 1.2, but first consider the case study
below. As the case study illustrates, the profit of a business is dependent on their ability
to efficiently deliver goods and services that society needs. However, where the
management of the organisation fails, and it is further influenced by players and factors
outside of their direct control, such as regulators and customers, it can lead to
disastrous consequences. Businesses also have to trade off the demands of
divergent stakeholders, such as employees, government, regulators and suppliers to
strive for sustainability and the best interests of the society they serve.
CASE STUDY: PRASA ON THE BRINK OF COLLAPSE 1
The urban passenger rail services operated by the Passenger Rail Agency of South Africa
(Prasa) have long been a backbone of the urban transport system, transporting millions of
workers to and from their workplaces every day. But by 2018, Prasa was reported to be on
the brink of financial collapse, and it was losing commuters who had lost confidence in its
ability to deliver on its core mandate of providing an efficient, safe and timeous urban train
service.
The continued decline in operating performance by the rail unit has shown a
corresponding effect on passenger patronage which dropped to 372 million passenger trips
per annum‚ against 448 million passenger trips the previous year, negatively impacting on
Prasa’s fare revenue and contributing to a loss of R928 million‚ up from a R554 million loss
the previous year.
Prasa’s acting CEO‚ Sibusiso Sithole‚ said the rail division’s disappointing performance‚
where only 33 per cent of its targets were achieved‚ posed a serious challenge in positioning
rail as the mode of choice for the commuting public. In fact, commuters were so frustrated
that they often reverted to violence, burning train carriages and further crippling the Prasa
fleet.
Prasa’s problems did not end there. Fruitless and wasteful expenditure incurred stood at
R988 million for Prasa and R992,2 million for the group, pointing to the governance
problems facing the entity. It was also facing a clampdown from the Railway Safety
Regulator (RSR) due to not meeting safety conditions and even operating without a safety
permit at one point. To add to its woes, the theft and vandalism of cables and components
aggravated the challenges of maintenance, resulting in increased numbers of rolling stock
unavailability and unreliability. This negatively affected the delivery of a safe‚ clean and
secure train service.
The board of Prasa faces a difficult challenge, and needs to urgently attend to the
uncertainty relating to the growing concern by ensuring financial viability and sustainability of
the agency, and addressing the governance and leadership instability characterising it.
1.2The role of business in society
The business world is a complex system of individuals and business organisations that,
in a market economy, involves the activity of transforming resources into products and
services in order to meet peoples’ needs. These products and services are offered to the
market in exchange for profit. This description of business emphasises four different
elements:
•Firstly, business involves human activities. Business organisations are managed by
people. While businesses may own property, machines and money, all of these are
managed or operated by people.
•Secondly, business involves production. Production is the transformation of
certain resources into products and services, as illustrated in Figure 1.1. This may
be, for example, the conversion of flour, sugar and butter into bread, or the
conversion of bricks, sand, cement, wood and steel into a house. Even services are
produced. For example, in a hospital, beds and medicine are converted into a health
service. An airline transports passengers to their required destinations, and as this
happens, the passengers become part of the transformation process.
•Thirdly, business involves exchange. Businesses produce products and services, not
for their own use, but to exchange for money or for other products and services.
•Finally, business involves profit. Few individuals or business organisations can
continue producing products and services without earning a profit. Profit is the
reward for meeting people’s needs, and it enables businesses to pay for resources
and to make a living. However, profit has to be earned in a way that is fair and
sustainable, and that is why the board of Prasa finds itself in the precarious position
of trying to turn around a business facing challenges on many fronts.
Figure 1.1: How entrepreneurs transform a nation’s resources into products and services
Some businesses produce predominantly tangible products such as bread, cars,
houses or bicycles. Other businesses produce predominantly services such as
entertainment, communication, insurance or transport.
Business is the means by which society endeavours to satisfy its needs and improve
its standard of living by creating wealth. At the heart of all business activity are
entrepreneurs, who start new ventures and thereby create jobs, economic growth and,
hopefully, prosperity. No one invented the business world. It is the result of activities
related to meeting the needs of people in a market economy.
The most important characteristic of the business world in the developed countries
of the West and Asia is the freedom of individuals to establish any business of their
choice and to produce, within limits, any product or service the market requires. This
system, in which individuals themselves decide what to produce, how to produce it and
at which price to sell their product, is called a market economy (or market system).
This is the prevailing economic system in South Africa.
The market economy is a complex system comprising various types of small and
large business organisations that collectively mobilise the resources of a country to
satisfy the needs of its inhabitants. These businesses group together to form industries.
Figure 1.2 shows the composition of the South African business world in terms of major
industry sectors and their contribution to the economy.
Figure 1.2: The composition of the South African business world in terms of sector
contribution to GDP2
Source: Statistics South Africa. 2018. Gross Domestic Product: Second quarter 2018. Statistical Release
P0441. Available at http://www.statssa.gov.za/publications/P0441/P04412ndQuarter2018.pdf [Accessed 17
October 2018].
The business world or economic structure of South Africa resembles that of many
industrialised countries, with a formal and informal sector. In the formal sector, large
businesses such as Standard Bank, Naspers, Vodacom, Anglo American, Tiger Brands
and many other large public corporations – 375 of which are listed on the Johannesburg
Securities Exchange (JSE) – are responsible for most of South Africa’s economic activity.
As market economies develop, they tend to become less dependent on primary
economic activities like mining and agriculture and more dependent on services. In
1920, for example, agriculture and mining combined contributed about 37 per cent to
the gross national product (GNP), compared to the 32 per cent contributed by the
service sector. As we can see in Figure 1.2, in 2018 the service sector contributed more
than 50 per cent of the GDP, with the contribution of agriculture and mining combined
shrinking to about 10 per cent.
Large businesses in South Africa contribute to about 70 per cent of the country’s
economic activity as reflected by turnover, while small, medium and micro enterprises
(SMMEs), which are mostly family or individually owned, contribute to about 30 per
cent.3 Many microenterprises form part of the so-called informal sector.4 They are not
part of the formal economy because they are not registered and many people involved
in these enterprises live primarily on a subsistence or survival basis. Moreover, such
businesses often put pressure on the infrastructure of inner-city areas, as due to their
informal nature they do not contribute to rates and taxes. It is estimated that these
businesses contribute approximately eight per cent of the annual GDP.5
The variety of needs that a country has determines the complexity of its business
environment. In First World countries, businesses are the primary source of products,
services and employment. Figure 1.3 shows the importance of the South African
business world in providing employment in South Africa, with the formal sector
providing by far the most jobs. However, it is also clear that informal businesses, farms
and private households are important providers of employment in a developing market
economy. The high unemployment rate in South Africa of about 27 per cent in 2018 and
the 2,8 million ‘discouraged work seekers’ is of great concern, as it suggests that the
prevalent institutional arrangements and economic growth rate in the country are not
supporting the establishment and growth of businesses.
Figure 1.3: Sources of employment
Source: Statistics South Africa. 2018. Quarterly Labour Force Survey. Second Quarter 2018. Statistical
Release P0211. Available at http://www.statssa.gov.za/publications/P0211/P02112ndQuarter2018.pdf.
Business creates wealth, is a catalyst for economic growth and is credited with
bringing about the high standard of living in developed countries. Take, for example, the
role business has played in the United States. In the space of two centuries, the United
States went from being a relatively undeveloped nation to a leading industrial nation,
which at that time owned nearly 40 per cent of the world’s wealth with only 6 per cent
of the world’s population. Adopting a more market- and business-oriented approach has
also been of great economic benefit to emerging economies such as China and India. In
China, for example, the gross national income (GNI) per capita6 grew from about $1 100
in 2002 to $8 690 in 2017 – a growth of almost 700 per cent in 15 years.7
Business also serves the community indirectly by means of technological innovation,
research and development, and improvements to infrastructure. It plays a crucial role in
supporting, in various ways, education, the development of human resources, the arts,
conservation, sport and other activities that improve the quality of life of a community.
The business world and society both depend on and influence each other. This is the
core of sustainability, the ability of a business to survive and prosper over long periods
of time. If a business behaves in a way that allows its stakeholders (such as the
communities it operates in and the environment) to benefit too, in exchange for a fair
profit, it has a better chance of surviving in the long term. However, practices that strive
to ensure excessive short-term profits and that are detrimental to stakeholders will
most often not be sustainable and will be to the detriment of the business. In South
Africa, we have seen the growth of corporate social responsibility, and the voluntary
compliance of businesses with practices that are sustainable. This is discussed in more
detail in Chapter 5.
At the heart of the business world is the entrepreneur or businessperson. In the
pursuit of profit, entrepreneurs constantly search for new ideas, new products and new
technologies. In so doing, they initiate innovation and bring about change by virtue of
their decisions on investment, production and employment, influencing not only the
state of the economy, but also the prosperity of whole communities.
Consider, for example, local entrepreneur Sarah Collins, inventor of the Wonderbag,
a South African-made heat retention cooker. Made from traditional shweshwe
Africanprint fabric, the Wonderbag resembles a beanbag filled with repurposed foam,
and is used to keep a boiling pot cooking after it has been taken off the stove or fire. This
environmentally friendly product is now sold in 52 countries, and already has 1,3
million users. The Wonderbag is manufactured in Tongaat, KwaZulu-Natal, employs
local women and is then sold to South Africans and exported to countries like the United
States and Australia. There are also satellite manufacturing sites in East Africa, West
Africa and in Turkey. Collins said that the Wonderbag has led to 10 000 entrepreneurs
starting ventures like selling Wonderbags or catering businesses.8
Conversely, society exerts its influence on the business world in a number of ways. If
businesses fail to abide by the expectations and desires of the community, regulation
and legislation to curb or control such practices can be instituted or enforced. In South
Africa we have seen anti-competitive behaviour in several industries, such as the
cement industry, the bread industry and the construction industry in the past few years.
Getting together with other producers to allocate markets, fix prices and share
information has only one purpose: to keep prices as high as possible. This kind of
behaviour is to the detriment of smaller producers and to consumers, especially the
poor, and is punishable by severe fines by the Competition Commission, a government
body instituted to ensure fair competition. The Consumer Protection Act (No. 68 of
2008) also aims, among many other objectives, to prohibit unfair business practices and
promote a consistent legislative and enforcement framework to protect consumers.
However, the legal route is not the only route available to society. By means of
stakeholder activism businesses can also be influenced to behave more responsibly. The
Occupy Wall Street (OWS) movement targeted a number of issues relating to social and
economic inequality, greed, corruption and the undue influence of large corporations on
government. The slogan of OWS – ‘We are the 99 per cent’ – reflected the social and
economic inequality in the United States and the goals of the organisation (‘we are the
99 per cent that will no longer tolerate the greed and corruption of the 1 per cent’). OWS
was a leaderless organisation that used the Arab Spring tactic to achieve its goals. 9 The
movement started in September 2011 with thousands of protesters camping in Zuccotti
Park in New York’s Wall Street financial district. The movement gained a largely
unrecognised victory in the momentum it built for a higher minimum wage when it
motivated fast-food workers in New York City to walk off the job in November 2012,
sparking a national workerled movement to raise the minimum wage to $15 an hour.
This resulted in several states and cities voting for higher minimum wages in
2014.10 The e-toll system in Gauteng provides another example of the effect of societal
pressure, with pressure groups such as the Organisation for Undoing Tax Abuse (OUTA)
being one example of an organisation that has fought on all fronts (legal and otherwise)
to prevent e-tolling in Gauteng. OUTA has expanded its activities to address other
perceived tax abuses such as corruption in state-owned enterprises.11
The attitude of society towards the business world is by no means consistent, for in
a changing environment the community will, at different times, have different
expectations of the business world. If the business world fails to respond to the
expectations of the community, the attitude of the community towards the business
world is likely to change. Consider, for example, the issue of equity in South African
organisations. When South Africa became a democracy in 1994, businesses were called
on to offer redress to previously disadvantaged individuals (PDIs). These programmes
required, inter alia, the appointment of PDIs, increasing PDI shareholding in businesses
and preferential procurement from black-owned businesses. However, because
businesses were slow to respond to this call, government instituted legislation that
forces the business world to transform its organisations so that PDIs are included at all
levels. The Employment Equity Act (No. 55 of 1998) and the Broad-Based Black
Economic Empowerment Act (No. 53 of 2003) are examples of society’s response to the
exclusion from business of PDIs, women and people with disabilities. (See Chapter 12
for a more in-depth discussion on the South African labour legislation framework.)
Most Western countries have, over the years, come to regard the business sector as a
valuable social institution because it has helped to realise society’s needs and also to
raise the standard of living. In the closing decades of the 20th century, however, most
Western nations realised that a high standard of living amid a deteriorating physical
environment and inadequate social progress is not sustainable. The business world is
thus under continuous and often increasing pressure to behave in ways that are
sustainable. There are several themes related to sustainability. In this chapter we
discuss five themes, namely social responsibility, employment equity, business ethics,
consumerism and environmental sustainability. A discussion of these factors will follow.
The social responsibility of business is a concept that originated in media
revelations of malpractice by businesses and the resultant insistence of society on
restricting such malpractice through regulation. Historically, the social responsibility of
a business has been measured by its contribution towards employment opportunities
and by its contribution to the economy. But while these factors remain important, many
other factors are now included in assessing the social performance of a business.
Businesses are nowadays under more pressure than ever to behave as responsible
citizens (leading to the notion of corporate citizenship). Their role accordingly goes
beyond financial success to include, inter alia, the provision of a responsible and safe
workplace, the provision of housing, concern about health issues, involvement with
community issues, environmental awareness and the empowerment of previously
disadvantaged individuals, both economically and managerially. Social responsibility is
discussed in more detail in Chapter 5. Businesses often contribute voluntarily and
directly to social causes and community upliftment by way of corporate social
investment.
Employment equity is the notion that the composition of the workforce at all levels
should reflect the composition of the community. It aims to create equal employment
opportunities for all and redress the inequalities of the past by ensuring that workforces
are composed in roughly the same proportions as the groups that make up the
population as a whole. In South Africa, the Employment Equity Act became law in 1998.
The stated intention of the Act is to eliminate unfair discrimination, ensure employment
equity and achieve a diverse workplace that is broadly representative of the country’s
demographic realities. The inclusion of previously disadvantaged individuals and other
designated groups (such as the physically disabled) at management level is of crucial
importance to South Africa’s economy to ensure that the government’s economic
growth targets can be achieved.
The South African government’s Accelerated and Shared Growth Initiative for South
Africa (AsgiSA) strategy aimed for an economic growth target of 4,5 per cent per year
for 2005 to 2009, and 6 per cent per year thereafter. However, while South Africa’s GDP
grew by approximately 5,1 per cent in 2007, it only grew by 3,1 per cent in 2008, and
then followed the rest of the world into recession. By June 2009, South Africa’s GDP had
decreased by an annualised rate of 6,4 per cent and, while growth has recovered
somewhat, it has remained at levels not nearly high enough to achieve our national
growth targets; for example, only 1,32 per cent growth was achieved in 2017. 12 For the
South African economy to grow at the much-needed level of 6 per cent or higher, there
must be enough skilled managers to drive the economy. It is widely recognised that
even a moderate real economic growth rate of 2,7 per cent per year will require an
additional 100 000 managers each year for the foreseeable future.
Since the traditional source of managers (the population of white males) has been
decreasing in relative terms, most of the managers that are required will have to come
from the black population. Since 1994, there has been a steady increase in the number
of black managers. Despite this growth, the white population – especially the white male
population – remains over-represented in management structures. However, these
levels are changing slowly but surely. According to the Commission for Employment
Equity, in South Africa in 2017, 22 per cent of senior managers were black (up from 9
per cent in 2001) and 56 per cent were white (down from 81 per cent in 2001). In 2017,
females of all races accounted for only 39 per cent of senior managers (up from 20 per
cent in 2001). Of professionally qualified employees in 2017, 42 per cent were black (up
from 33 per cent in 2001) and 37 per cent were white (down from 56 per cent in 2001).
Females represented 47 per cent of this category, up from 38 per cent in 2003.13
CASE STUDY: The growth of broad-based BEE in South Africa
It is generally accepted that ownership is by far the most successful area of transformation,
with billions being spent to transfer ownership to previously disadvantaged individuals.
According to research by Intellidex, by 2014 BEE ownership deals done since 2000 had
created R317 billion in total value attributable to beneficiaries. By 2017, R52 billion had gone
to charities, with R32,6 billion of this ending up as endowments in 27 foundations created
through such deals.
A further indicator of the impact of broad-based BEE in South Africa, as highlighted by
Empowerdex, is the number of black directors on the boards of JSE-listed companies. In
1992, South Africa had 15 black directors on the boards of JSE-listed companies. In 1997,
there were 98. By 2003, this number had increased to 207 and in 2016, there were 1 043
black directors. However, The South African Institute of Chartered Accountants (SAICA)
noted in a 2014 study that 8 per cent of all JSE-listed directorships were held by black
women, 5 per cent by white women, 17 per cent by black men and 70 per cent by white
men. In addition, growth in BEE appointments in directorships seems to be slowing,
suggesting that a renewed focus on BEE may be required. In 2017, the top five performers
on the JSE with regard to BEE were as follows:
Sources: Intellidex.
2017.
The
Empowerment
Report:
Special
Edition.
Available
at http://www.intellidex.co.za/wp-content/uploads/2018/03/MEC-2017-printed-version-editorial-only.pdf.
[Accessed 22 October 2018]; Ziady, H. 2017. BEE deals — the surprising truth. Financial Mail. Available
at https://www.businesslive.co.za/fm/fm-fox/2017-06-29-bee-deals-the-surprising-truth/.
[Accessed
22
October 2018]; Dobbin, J. 2016. JSE-listed directors still mainly pale males — majorities grossly underrepresented. Mail & Guardian. Available at https://mg.co.za/article/2016-08-31-00-jse-listed-directors-stillmainly-pale-males-majorities-grossly-under-represented [Accessed 22 October 2018].
Business ethics is a concept that is closely related to social responsibility, but where
social responsibility focuses on the organisation, business ethics focuses specifically on
the ethical behaviour of managers and executives in the business world. Managers, in
particular, are expected to maintain high ethical standards, as they are often in positions
where they can abuse their power, for example to award contracts. To make business
ethics practical, many organisations nowadays have codes of business conduct to
provide clear guidelines to managers on what is ethical and what is not. One common
rule, for example, is that no business gifts may be accepted, or that all gifts over a
certain value have to be declared. Chapter 5 will focus on social responsibility and
business ethics.
While there are business concepts regulating the business environment, its
employees and society as a whole, specific reference should be made to the concept of
consumerism. Consumerism is a social force that protects consumers against unsafe
products and malpractice by exerting moral and economic pressure on businesses. In
South Africa, the South African National Consumer Union acts as a watchdog for
consumers and many avenues for consumer protection have already been instituted,
while more legislation has also been instituted to protect consumers. Some observers
have suggested that the Consumer Protection Act (No. 68 of 2008), signed into law in
2011, makes South African consumers among the best-protected consumers in the
world. It forces the producers of goods and services to take full responsibility for
ensuring that their products and services comply with standards, and the Act enforces
certain minimum warranties and indemnities to protect the buyers of goods and
services.
Society has also become more concerned about environmental sustainability and
increasingly stakeholder activism and legislation are forcing businesses to take the
environment into consideration. Businesses are unfortunately frequently responsible
for air, water and soil pollution, and for the resultant detrimental effects on fauna
and flora. Citizens therefore often form pressure groups to protect the environment.
Greenpeace is perhaps the best-known environmental pressure group globally. In
November 2017 a group of 15 Greenpeace activists with nuclear barrels blocked the
main entrance of the South African Department of Environmental Affairs. The protest
was directed at getting the Department to withdraw the environmental authorisation
for a proposed new nuclear power station at Duynefontein.14
The business world is so interconnected with society that it may be defined as a
process that uses a country’s means of production to produce products and services to
satisfy the needs of people. The primary purpose of business in a free-market system is,
therefore, to make a profit while satisfying the needs of the people. A brief overview of
the needs of communities, and of the means of satisfying these needs, is given below to
explain not only the purpose of business in a market system, but also the extent of the
field of business management, which is the focus of this book.
1.3Needs and need satisfaction
1.3.1The multiplicity of human needs
The continued existence of humans depends upon the constant satisfaction of numerous
needs, both physical and psychological. The work that every member of a community
performs is directly or indirectly related to need satisfaction. Even in the most remote
and uninhabited areas, certain products and services are needed.
Needs may be very simple and few, as in the case of a rural and underdeveloped
community in which individuals or families, with the help of nature, find the resources
necessary to satisfy a simple need structure. For example, the traditional lifestyle of the
San people of the Kalahari depends on the satisfaction of the most basic necessities for
survival. However, in highly industrialised communities, needs may be numerous and
may therefore require large and complex organisations to satisfy their needs. A need
may have a physical, psychological or social origin, but no matter which form it takes, it
requires satisfaction. The number of identifiable needs is infinite. Some needs,
particularly those that are physiological, are related to absolutely basic necessities, such
as the satisfaction of hunger and thirst. These needs have to be satisfied for the sake of
survival. Other needs, particularly those that are psychological, relate to things that
make life more pleasant, but that are not essential to survival. These needs include the
need for holidays, cellphones, dishwashers, swimming pools, luxury cars, and
innumerable products and services of a similar nature.
Basic physical and psychological needs may also overlap. For example, people do not
wear clothes merely for warmth and protection, but also to be fashionable. Some people
enjoy expensive delicacies accompanied by fine wines in luxurious restaurants and, in
this way simultaneously satisfy survival needs and psychological needs.
Abraham Maslow (1908–1970) was an American clinical psychologist who
explained variable and unlimited human needs by means of a hierarchy of needs.
According to Maslow, human needs range, in a definite order, from the most essential
for survival to the least necessary. The left-hand side of Figure 1.4 shows Maslow’s
hierarchy of needs (see section 12.7.2.2 in Chapter 12 as well). It is clear from Figure
1.4 that the needs hierarchy is composed in such a way that the order of importance
ranges from basic physiological needs, which have to be satisfied for survival, to
psychological needs, with which the higher levels of the hierarchy are mainly
concerned. Because humans are social beings who live in communities, they also have
collective needs, such as protection and education. An individual, a family or a
community first satisfies the most urgent needs, and then, when this has been done,
moves up to the next level until the higher psychological levels are reached. With
changing circumstances, individuals not only desire more possessions, but also
continually want still newer and better products and services. For example, radio offers
entertainment, but black-and-white television is believed to offer better entertainment,
and colour television still better entertainment. Once these products and services have
been acquired, however, the need arises for a DVD player, more television channels and
content – as evidenced in the phenomenal growth of DStv and Netflix – and more and
better programmes. As society satisfies one need, a new one comes into existence, and
there is no end to the constantly increasing number of human needs.
Table 1.1 below indicates some of the needs people (households) have and what
they spend their income on. It is interesting to note that in 2014/2015, South African
households spent, on average, about 13 per cent of their income on food, which satisfies
one of the most basic needs. However, in higher-income households relatively less is
spent on food, and more is spent on entertainment and other discretionary activities,
while lower-income households spend comparatively more on food as a percentage of
their income. It is important to keep in mind that the percentages given in Table 1.1 are
of average household consumption. Since South Africa has a diverse population, it also
has diverse needs and consumption patterns. From Table 1.1 we can also see how needs
change over time for various reasons. For example, expenditure on housing, water,
electricity, gas and other fuels has increased sharply, due, inter alia, to dramatic
increases in electricity tariffs, higher estimation of house values leading to higher
property taxes, and higher rental prices. Increased spending in one area leads to
decreased spending in other areas, and we can see how relative spending on food,
clothing and household maintenance have decreased.
Table 1.1: Expenditure patterns for South African households
Products and services bought
Expenditure in 2005/6 as % of
total expenditure
Expenditure in 2014
total expenditure
Food and non-alcoholic beverages
14,4
12,9
Alcoholic beverages and tobacco
1,02
0,9
Clothing and footwear
5,0
4,8
Housing, water, electricity, gas and other fuels
23,6
32,6
Furnishings, household equipment and routine
maintenance of the house
6,9
5,2
Health
1,7
0,9
Transport
19,9
16,3
Communication
3,5
3,4
Recreation and culture
4,6
3,8
Education
2,4
2,5
Restaurants and hotels
2,2
2,1
Miscellaneous products and services
14,4
14,7
Other unclassified expenses
0,3
0,1
Total
100
100
Source: Statistics South Africa. 2017. Living conditions 2014/15. Statistical Release P0310. Available
at http://www.statssa.gov.za/publications/P0310/P03102014.pdf. [Accessed 22 October 2018].
1.3.2Society’s limited resources
If one considers the multiple and unlimited needs of humans, especially in highly
developed societies, it is clear that there are only limited resources available to satisfy
all their needs. Although Western countries, most notably the United States, possess
very impressive means of production, even they do not have unlimited resources. Water
is a key resource to individuals and businesses alike, yet water scarcity is a potentially
massive problem facing both South Africa and the world, as we can see in the case study
below: ‘Keeping Cape Town’s taps running’.
A country has only a certain number of people in its workforce to operate a certain
number of machines, and a certain number of factories, hospitals and offices to produce
a certain quantity of products and services. In other words, the resources of any
community are scarce, and can easily be exceeded by its needs. Resources are therefore
the basic inputs in the production of products and services, and they are also known as
production factors.
Figure 1.4 shows the resources that society possesses in limited quantities only and
which it uses to satisfy its needs: natural resources, human resources, capital and
entrepreneurship. These resources are discussed in more detail below.
Figure 1.4: The needs and resources of the community
Source: Compiled from information in the chapter.
1.3.2.1Natural resources
Natural resources, also known as the production factor of land, include agricultural
land, industrial sites, residential stands, minerals and metals, forests, water and all such
resources that nature puts at the disposal of human kind. The most important
characteristic of natural resources is that their supply cannot be increased. In other
words, the amount of natural resources any one country possesses is given, and is in
most cases, therefore, scarce. Moreover, human effort is usually necessary to process
these resources into need-satisfying products – for example, in the transformation of
forests into timber and paper or, in the case of the airline industry, the refining of oil to
produce the jet fuels that aeroplanes need to fly. In the process, natural resources are
depleted and may become even scarcer.
1.3.2.2Human resources
Human resources, also known as the production factor of labour, include the physical
and mental talents and skills of people employed to create products and services.
People receive wages for their labour. The size of the labour force of any country and,
therefore, in a sense, the availability of that production factor, is determined by, among
other things, the size of the population, the level of its education and training, the
proportion of women in the labour force and the retirement age. For the manufacturing
processes of a country to be of any value, the country’s labour force has to be trained for
certain periods and to certain levels of skill to be able to produce the products and
services required. Training periods will differ depending on the skill being learnt. For
example, the training period of a flight attendant will be considerably shorter than the
training period of a pilot. The combination of human skills is of particular importance,
for without this combination, natural and financial resources cannot be utilised
productively. In South Africa we have a situation where there is an oversupply of
unskilled labour and a shortage of certain types of highly skilled labour.
CASE STUDY: Keeping Cape Town’s taps running
In the summer of 2017, Cape Town faced a severe water crisis with dams drying up and
predictions at one point suggesting that the metro was only days away from running out of
water. The drought forced the city and its residents to seriously consider their water usage
habits, and to start investigating other options for a sustainable water supply, such as the
desalination of seawater. However, alternatives like desalination are expensive. For
example, at the Adaptation Futures 2018 conference, Gisela Kaiser, the City of Cape Town’s
Executive Director for Water and Waste, said that a small temporary desalination plant will
take three months and cost R350 million to raise the level of Cape Town’s supply dams by
just one per cent. The city is also trying to build resilience in Cape Town’s water supply, for
example by reclaiming storm water - rainfall that usually runs into drains and out to sea.
The availability of surface water in the Western Cape water supply system has been
reduced by climate change (resulting in less rain) and the invasion by alien vegetation in
water catchment areas. Cape Town is by no means alone in this crisis. Australian city
Perth’s annual rainfall has been declining by 3mm a year on average, while average
temperatures in the region have increased by 1°C in the last 40 years. Perth subsequently
relies less on dams and more on desalination and groundwater for their water supply.
Whilst the urban water problem might appear to be a Cape Town-specific problem,
Hastings Chikoko, Regional Director for C40 Cities in Africa, has commented that one in four
large cities globally are water stressed.
Sources: Compiled from information in Gosling, M. 22 June 2018. Getting below the surface of the Cape
Town water crisis. News 24. Available at https://www.news24.com/SouthAfrica/News/getting-below-thesurface-of-the-cape-town-water-crisis-20180622 [Accessed 22 October 2018]; Adaption Futures. 2018. 5th
International Climate Change Adaptation Conference. Cape Town 18 - 21 June. Available
at https://adaptationfutures2018.capetown/ ; Water outlook 2018 report. 2018. Department of Water and
Sanitation.
City
of
Cape
Town.
Available
at http://resource.capetown.gov.za/documentcentre/Documents/City%20research%20reports%20and%20r
eview/Water%20Outlook%202018_Rev%2030_31%20December%202018.pdf.
1.3.2.3Capital
Capital is represented by the buildings, machinery, cash registers, computers and other
products, produced not for final human consumption, but for making possible the
further production of final consumer products. Capital products usually have a long
working life – for example, office buildings, factories, machinery and other equipment
may be used over and over again in the production process. In the airline industry,
capital usually has an exceptionally long working life, but also comes at a very high
price. The reason for the scarcity factor of capital is that a community takes years to
build up its stock of capital. Every year it spends a certain amount on things such as
roads, bridges, mine shafts, factories and shopping centres, and there is always a
shortage of these things. The owners or suppliers of capital are usually remunerated in
the form of interest or rent.
1.3.2.4Entrepreneurship
Entrepreneurship is the fourth factor of production. It refers to the collective capacity
of entrepreneurs, who are those individuals who accept the risks involved in providing
products and services for their society. Entrepreneurs like Simbarashe Mhuriro (see box
Entrepreneurship in solar power) take the risk of providing their knowledge and capital
in setting up a business with the prospect of being rewarded with significant profits if
they are successful. On the other hand, if they do not succeed, they may lose a lot. The
production factor of entrepreneurship is scarce in the sense that not everybody in a
community is prepared to take the risks that are inevitable when providing new
products or services, or has the ability to manage an organisation successfully. Although
the contemporary focus on entrepreneurship is mainly on small and medium
businesses, entrepreneurs are not limited to these. A large or corporate business is also
a place for entrepreneurship. (See Chapter 2 for a more detailed discussion on
entrepreneurs and entrepreneurship.)
Entrepreneurship in solar power
Simbarashe Mhuriro is the founder and Managing Director of Oxygen Energy Private
Limited, an independent power producer and renewable energy development company that
specialises in utility scale power plants and industrial and commercial rooftop projects. In
2017, the African Development Bank (AfDB)-managed sustainable energy fund for Africa
(SEFA) approved a US$ 965,000 grant to Oxygen Energy Private Limited. The grant will
enable the preparation of a bankable business case for the development of a 20MW off-grid
solar photovoltaic rooftop project on buildings owned and managed by Old Mutual Property
Group, the largest property investment managers in Zimbabwe. When the project is
completed, it will provide reliable and competitive solar power to hundreds of small- and
medium-sized enterprises throughout Zimbabwe.15
1.3.3Need satisfaction: A cycle
To be able to satisfy the needs of the community, entrepreneurs have to utilise scarce
resources in certain combinations to produce products and services. Economic value is
created in the course of the production process by combining production factors in such
a way that final products are produced for consumers. A nation’s survival depends on
the satisfaction of its people’s needs. Striving for need satisfaction with the limited
resources available is an incentive for economic progress.
Given its unlimited needs but limited resources, society is confronted with the
fundamental economic problem: how to ensure the highest possible satisfaction of
needs with these scarce resources. This is also known as the economic principle.
Society cannot always get what it wants, so it must choose how it will use its scarce
resources to the maximum effect to satisfy its needs. In short, it has to decide about
solving the following economic issues:
•Which products and services should be produced, and in what quantities? (How
many capital products should be produced? How many consumer products should
be produced? Should railways or trucks, houses or flats be built? If flats are chosen,
how many should be built?)
•Who should produce these products? (Should the state or private individuals take
charge of production? Or should this responsibility be shared, as in the case of South
Africa’s airline industry?)
•How should these products and services be produced, and which resources should
be used? (There are various methods of production and types of resources that
should be considered. For example, should a production-line method be chosen?
Should a labour-intensive approach be used?)
•For whom are these products and services to be produced? (Will the products cater
largely for the needs of the rich or the poor? Will services be aimed at business
clients or families?)
The answers to address the economic issues listed above are given by the community.
The community decides which institutions should be responsible for the production
and distribution of products and services, as well as the role that each institution has to
play. In South Africa we are constantly seeing debates around nationalisation and
privatisation, with some arguing that strategic sectors (such as mines and banks) should
be controlled by government (nationalised), while others argue that key state assets
such as Eskom can only reach its full potential if it is not controlled by the state but by
private investors (privatisation). This is an example of a community seeking an answer
to the question of who should produce these products or services – the state, private
enterprise, or a combination of the two.
Figure 1.5 shows how, against the background of its needs, and by means of its
political process, the community determines the economic system in which the
necessary need-satisfying institutions are established.
In a market economy, need-satisfying institutions, including business organisations
and government organisations, offer products and services on the market in return for
profit. If the community is not satisfied with the way in which these organisations
provide for its needs, it will change the economic system or choose a new needsatisfying system. The appearance of new businesses and the disappearance of others
are examples of this cycle of need satisfaction in the community.
Another example of this cycle at work that illustrates the community getting what it
wants occurred in the form of South African businesses offering longer shopping hours
from 1965 onwards. This change occurred because of the large-scale urbanisation
of South African society and the participation of women in the labour markets. These
women found the opportunity to shop on Saturday afternoons and Sundays very useful.
Figure 1.5: The cycle of need satisfaction in a community
Source: Compiled from chapter content.
Over the years, different communities have developed different approaches in order
to satisfy their needs, and different economic systems have been tried and tested. Each
of these systems, as chosen by various communities to satisfy specific needs, has its own
approach to the fundamental economic problem of which products and services should
be provided by whom and for whom. The study of these systems constitutes the field of
economics as a social science and examines the means used to satisfy innumerable
human needs with limited resources. Business management, in contrast, is concerned
with the institutions that are created in the economic system to satisfy the needs of a
community, and these are mainly business organisations.
To provide some necessary background to the study of business management and
the role of business organisations in society, a brief overview of the different economic
systems now follows.
The changing need for communication
The needs of society ultimately culminate in products or services that satisfy particular
needs. A case in point is cellphones. People have a basic need to communicate and, where
this is possible, to communicate with individuals over long distances. During most of the last
century, the only way this could be done was by means of the telephone, where the caller
first had to call a specific building (house or office) and then wait for the relevant person to
answer, or to be found by whoever answered the phone. The cellphone was, therefore, a
response to the need to communicate immediately with a specific individual, without the
inconvenience of having to locate the person first or the frustration of dealing with
inoperative telephone lines.
As consumer needs have evolved, so did the design and functionality of cellphones and
other mobile devices. Cellphones are no longer just a means of communication. The
emergence of new mobile technologies in the form of smart phones (like the Samsung Sseries and the iPhone) and tablets (such as the iPad and Samsung Galaxy Tab) have taken
mobile communication to a new level. Nowadays, cellphones also serve as high-megapixel
cameras, radios, music players, memory cards, email and Internet access devices,
geographical positioning systems (GPS), and online banking devices.
It is interesting to note that in 2018, the number of cellphones in South Africa exceeded
the population. At the same time, the number of cellphones seems to be declining, while the
use of smart devices like the iPhone is on the rise as consumer needs change and they
exchange their mobile phones for smart phones or tablets. Internet access is on the rise,
with about 56 per cent of South Africans using the Internet in some form. The importance of,
and increase in data usage is reflected by the fact that more than 75 per cent of Internet
traffic is generated by mobile devices. 16
1.4The main economic systems
1.4.1The community and its economic system
Every community is engaged in a struggle for survival that is necessitated by scarcity.
Therefore, each community needs to have a complex mechanism that is constantly
dealing with the complicated task of ensuring that the production and distribution of
products occurs. Each country is confronted with the fundamental economic problem of
which economic system to choose to solve the problem of which products should be
produced and marketed by which producers for which consumers. Each country must
decide on some system to solve that problem.
Over the years, countries and communities have approached need satisfaction in
different ways. There are three main approaches that are still followed by present-day
communities for the solution of their fundamental economic problems. They are the
market economy, the command economy and socialism. While these economic systems
are often incorrectly referred to as political ideologies, they should rather be described
as economic systems influenced by politics. It is necessary to take a brief look at these
systems to understand the origin and role of business organisations in society. As none
of these economic systems is ever found in a pure form, the discussion that follows is
merely an exposition of the basic premises of each system.
1.4.2The market economy
One of the economic systems adopted for solving economic problems is the market
economy, also known as the free-market economy or free-enterprise system.
It is a system in which most products and services demanded by a community are
supplied by private organisations seeking profits. It functions on the following
assumptions:
•Members of a community may possess assets and earn profits on these.
•The allocation of resources is affected by free markets.
•Members of the community can freely choose between products, services, places of
residence and careers.
•The state keeps its interference in the system to a minimum.
In the market economy, particular value is attached to the right of individuals to possess
property such as land, buildings, equipment or vehicles, including the right to earn an
income from this property. This right is also the driving force of the market economy: it
stimulates individuals and entrepreneurs to acquire more assets and to make a profit
through the productive utilisation of their assets or their capital. In the pursuit of
maximum profits, this capital, which is nothing other than the resources of the
community, is applied as productively as possible.
This aspect also affects the distribution of resources through free markets. The
private possession of capital has an important influence on the manner in which
resources are allocated or employed in a market economy, as the decisions about what
products should be produced by which producers rest with those who own the
resources.
This means that farmers, factory owners, industrialists and individuals are free to do
what they like with their assets. However, in their decisions concerning production and
marketing, they have to take account of the tastes, preferences and other demands of
consumers if they want to make a profit. Thus, the question of which consumers’ needs
should be met (for whom?) is answered. Such decisions in a market economy are not
taken by some central body but by a system of free markets, which indirectly puts a
price on every production factor or consumer product.
Free markets also imply the third characteristic of this system: freedom of choice.
The producers are able to decide whether they can profitably produce their products at
the prices set by the market. This is the producers’ free choice. Likewise, the consumer
is free to choose whether to buy the product at that price. The consumer is also free to
live where he or she wishes and to study and train for whichever career he or she wants
to follow. A system of free markets therefore necessarily entails freedom of choice.
Private owners of property are free to own what they like and to do with it as they
please: rent it out, sell it, exchange it or even give it away. People with businesses are
free to produce what they wish and to employ whomever they choose. Similarly,
workers, who own their labour, can use this human resource as they choose. In this
way, competition comes into operation in a system of free markets.
The final characteristic of a free-market economy is minimum state interference
in markets. The assumption is that the state should merely ensure the proper
maintenance of the system without excessive regulation of, or even participation in, the
business world.
However, market economies are not all about good news. With the global financial
crisis in 2008, free market economic systems (capitalism) came in for a lot of criticism,
as the perception developed (with good reason) that bankers took huge and
unsustainable risks based on little but greed, and when the system collapsed the state
and ordinary people had to bear the cost. Capitalism has also been criticised for creating
inequalities in society between rich and poor, the very aspect that movements like
Occupy Wall Street opposed so strongly. More recently in South Africa, Adv Terry Motau
SC and Werksmans Attorneys produced a damning report into fraud, probable money
laundering and reckless business practices at VBS Mutual Bank, finding that more than
50 people unjustifiably and illegally received almost R2-billion between 2015 and 2018,
leading to the collapse of the institution.17 The VBS Mutual Bank scandal has once again
illustrated how corruption and greed led to massive losses for local governments (many
of them serving poor communities) and lower income individuals who had their savings
deposited at the institution.
1.4.3The command economy
The second type of economic system is a command economy or a centrally directed
economic system. Adopted by some countries as an alternative to a market economy, it
was until recently known as communism. Its main characteristic is that the state owns
and controls the community’s resources or factors of production.
A command economy is a system of communal ownership of a country’s factors of
production in which the individual owns no property, with the exception of private
domestic assets. This means that individuals own no land, factories or equipment. The
state assumes complete responsibility for the production and distribution of products
and services, and all decisions about what should be produced – and about how, by
whom and for whom it should be produced – rest with a central government.
The choices of products and services are therefore limited to what the state offers;
the design of these products falls entirely outside the control of ordinary individuals. It
is the state that decides what the needs of the community are, how and where the
desired products will be obtainable, and in which quantities they may be used. In the
absence of free consumer choice, the profit motive is also absent, as is the competition
factor, because, as mentioned above, the state owns the organisations that produce the
products and services.
In most countries that adopted a command economy, the system failed because it
robbed individuals of the initiative to produce products and services, and it prevented
the creation of wealth. The poverty of the Soviet Union and other Eastern European
countries and their collapse in the late 20th century is evidence that the system did not
create wealth. Command economies are, nevertheless, still officially adhered to in Cuba,
North Korea and some African states.
1.4.4Socialism
Socialism is the third economic system, and may be regarded as a compromise between
a pure market economy and a pure command economy. Under socialism, the state owns
and controls the principal (generally strategic) industries and resources, such as
manufacturers of steel, transportation, communications, health services and energy.
Less important and smaller matters such as trade and construction, as well as the
production of materials and services of lesser strategic importance, are left to private
initiative. In socialism, the fundamental assumption is that strategic and basic resources
should belong to every member of the community. For the rest, businesses and
consumers operate within free markets in which they are at liberty to make decisions
without restriction. Although consumers in a socialist economy have greater freedom of
choice than those under a command economy, the provision of the basic products and
services by the state is a limiting factor in the creation of wealth.
A free economy creates wealth
The Heritage Foundation and Wall Street Journal’s 2018 Index of Economic
Freedom18 measures how well 180 countries score on an analysis of 10 specific components
of economic freedom. These components include business freedom, trade freedom, fiscal
freedom, government size, monetary freedom, investment freedom, financial freedom,
property rights, freedom from corruption and labour freedom. Taken cumulatively, these
factors offer an empirical snapshot of a country’s level of economic freedom.
Scores are given out of 100, where 100 and 0 represent the maximum and minimum
freedom of an economy respectively. The results demonstrate beyond doubt that countries
with the highest levels of economic freedom also have the highest living standards.
Out of all the regions, sub-Saharan Africa scored the lowest on the 2018 Index of
Economic Freedom, with an average of 54,4. Mauritius was the highest-ranking African
country, scoring 75,1 (down from 76,4 in 2015), making it the 21st freest economy in the
world (down from 10th in 2015). The leader in sub-Saharan Africa, Botswana (with 69,9) was
second in the region and was rated 35th in the world. South Africa was ranked fourth in the
region with a score of 63 and ranked 77th in the world – down from 61st in 2009. Given that
South Africa slipped 5 places despite its rating remaining about the same as in 2015, it
would seem as if there is a trend for economies to become freer in general. A comparison of
20 selected country economic freedom ratings is presented in Figure 1.6.
The Heritage Foundation remarked that South Africa’s economic growth has decelerated
because of declining global competitiveness, growing political instability and weakened rule
of law. This caused the country’s investment-grade credit rating to be downgraded to junk
status in 2017, denting investor confidence. South Africa is also plagued by rising public
debt, inefficient state-owned enterprises and spending pressures, while the judicial system is
increasingly vulnerable to political interference. The numerous scandals (such as the
investigation into state capture) and frequent political infighting have severely undermined
the integrity of government. Countries with high scores on the Index of Economic Freedom
generally earn higher incomes per capita. For example, Hong Kong, which is listed as the
freest economy in the world, had an average GDP per capita in 2018 of US$58 322.
Countries with lower scores generally produce and earn much less. South Africans, for
example, had a GDP per capita of only US$13 225 per capita in 2018.
Figure 1.6: 2018 assessment of economic freedom of different countries
Source: Heritage
Foundation.
2018
Index
of
Economic
Freedom.
Available
at http://www.heritage.org/index/ranking [Accessed 22 October 2018]. Reprinted by permission of the
Heritage Foundation.
1.4.5Mixed economies
None of the three main economic systems in use occurs in a pure form anywhere. They
typically occur as mixed economies, with the dominant system incorporating certain
characteristics of the other systems. Thus China, which officially has a command
economy, employs private initiative, while growing state intervention in key industries
in the major market economies of the world (especially after the global financial crisis)
is no strange phenomenon. The USA is often regarded as a beacon of a free market
economy, while it is in fact a mixed economy.
Figure 1.7 shows the relative success of various countries with different economic
systems. Citizens in high-income countries earned about $47 510 per capita in 2018,
and are usually free market economies (such as Hong Kong and the USA) or developed
socialist or mixed economies such as the USA, Sweden and the UK. In comparison, the
poorest countries had a GNI of only about $2 085 per capita, and consist mostly of
economies that are not free (such as North Korea) or are only just emerging from
command economies (such as Ethiopia and Mozambique). The findings depicted in
Figure 1.7 seem to support the notion that wealth is generally best created by a wellfunctioning market economy, while predominantly command economies have not
succeeded in creating significant wealth.
Countries such as South Africa, China and Brazil, with unique economic systems, rate
about midway between the richest and poorest countries of the world. Several factors,
including education, culture and work ethic, affect the prosperity of any particular
country, but Figure 1.7 shows that countries with well-functioning market economies
are generally wealthier than others.
Figure 1.7: A comparison of the gross national income per capita in 2017 of people in a
variety of economic systems
Sources: Adapted from information obtained from the World Bank Doing Business data. Available
at http://www.doingbusiness.org/en/data; www.doingbusiness.org and the World Bank data on GNI.
Available at https://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD?locations=CU. [Accessed 24
October 2018].
1.4.6The state and economic systems
The fact that under both the market system and socialism the state intervenes to help
solve the economic problem does not mean that there is necessarily a tendency to move
in the direction of a command or centrally directed economy. There are two conflicting
views of the role of the state in economic systems. A conservative perspective argues
that the role of the state should be extremely limited. This view questions the
government’s ability to solve social and economic problems and argues that the state’s
role should be carefully limited to what is absolutely necessary. However, there are
certain key shortcomings inherent in the conservative view and the free markets it
advocates:19
•Free markets are subject to economic fluctuations, unemployment and inflation.
•This view creates economic inequality as income is distributed unequally.
•Markets are not always subject to perfect competition and where monopolies or
imperfect competition is present, resources may be allocated inefficiently.
•Markets deal poorly with the side effects of economic activity, such as pollution.
•There are certain public goods that the market cannot provide, such as national
defence and the justice system.
The liberal view points out these important limitations of the market system, and
claims that governments can do a great deal to overcome these limitations, such as
regulating private economic activity and providing goods and services of which the
private sector produces too little. Examples of possible necessary government
interventions may include the protection of natural resources by preventing pollution,
the restriction of monopolistic practices by ensuring competition, and the protection of
consumers against false or misleading information and exploitation. The state can also
assist businesses by stimulating the economic system (for example, through promoting
exports, encouraging the creation of small businesses, assisting research and granting
subsidies). Essentially, government intervention in the economic system should aim to
encourage economic growth and stability and effect greater equity in the distribution of
income.
A much-debated form of government intervention takes place when the state does
not limit itself to the above-mentioned activities, but acts as an entrepreneur and
business owner in its own right and even competes with other privately owned
businesses. The state does this in the areas of transport services, electricity supply,
arms manufacture, broadcasting and television services, and many other industries in
South Africa.
The main reasons usually advanced for government intervention is that the private
entrepreneur is not interested in these activities and may not even be capable of
carrying them out. This may be because of the enormous scale of the businesses that
produce services such as transport and electricity, and the corresponding risks attached
to them. It is also argued that some organisations are of such strategic importance to the
community that they cannot be left to profit-seeking private entrepreneurs.
However, these arguments do not entirely justify a regular and continuous
entrepreneurial role played by government. If any such intervention by the state is
carried to excess, the result is a bureaucracy that affects national productivity adversely
by limiting private competition. For that reason, among others, public–private
partnerships (PPPs) have become commonplace. Governments often use PPPs to
develop large capital projects in partnership with private enterprise. They pool their
resources to develop, for example, infrastructure, which the private enterprise then
runs for profit. Toll roads are a typical example of a PPP, as is the Gautrain, the state-ofthe-art rapid-rail project of the Gauteng Provincial Government.
1.4.7Final comments on different economic systems
Different countries use different economic systems to meet their needs using their
available resources. Each system thus has its own peculiar characteristics (as Table 1.2
shows) and each democratic country arranges its economic system in such a way that it
solves its wealth problem as effectively as possible in accordance with the wishes of its
inhabitants. Bearing in mind that pure forms of the different economic systems almost
never exist, the most appropriate description of the prevailing economic system in
South Africa is that it is a mixture between the market system and the socialist system.
More precisely, the South African economic system can be defined as one that is moving
towards a market-oriented economy, yet presently has a high degree of government
participation in, and control of, the economy.
Table 1.2: A comparison of the main economic systems
Mobility: The key to future economic growth
The Gautrain has been in operation since 2010, linking Sandton, the OR Tambo
International Airport and the City of Tshwane with a high-speed commuter rail system. The
Gautrain project is owned by the Gauteng Department of Transport and is a project of the
Gauteng Provincial Government, but was built and is operated by the Bombela Consortium.
The Gautrain has proved to be very popular with commuters, with 63 000 using the train
every weekday.
This multibillion-rand initiative, designed in line with global practice, is a good example of
a successful public–private partnership, and aims to enhance and support economic growth
in the Gauteng Province and generate employment. When looking at current Gautrain
operations, the system contributed R1,7-billion a year to provincial GDP, while sustaining
about 6 000 jobs in Gauteng in 2013. The system also increased government revenue by
around R400 million a year, with around R200 million received by lower-income households,
again mainly through wages and salaries. For every R1 spent on operating the Gautrain, the
provincial economy gained another 96c, and the national economy 24c. The Gautrain has
also improved the quality of life of the province’s residents, reducing road congestion by
cutting car trips per day by 21 300.
Around R10-billion was invested in new developments and upgrades to retail centres in a
10 km radius around Gautrain stations between 2009 and 2014. R1-billion was invested in
office space, and residential property saw an increase in property value of R12,9-billion.
Source: Venter, I. 9 July 2015. Gautrain boosts GDP, property development, says KPMG report. Creamer
Media’s Engineering News. Available at http://www.engineeringnews.co.za/article/gautrain-boosts-gdpproperty-development-says-kpmg-report-2015-07-09 [Accessed 22 October 2018]. Reprinted by
permission of Creamer Media.
The South African economy20
The economic systems of Western countries, with which South Africa associates itself, are
typically combinations of a market economy and socialism. Despite the defects and
shortcomings of the more-or-less free-market order in South Africa, most inhabitants believe
that this economic system satisfies their needs better than any system that might be based
on pure socialism or a command economy.
Since 1994, South Africa has steadily moved to an increasingly market-oriented position
with decreasing government intervention and control. This move has undoubtedly had a
positive effect on the South African economy, as can be seen in the figures below.
In 2004, South Africa’s GDP figure stood at R1 404 billion and GDP per capita was R30
129. Consumer price inflation was at its lowest level in 40 years (3,4 per cent) and producer
price inflation was at a 58-year low (1,9 per cent). South Africa had become an important
role-player in global exports and, hence, in the global economy.
By 2007, economic stability was evident in South Africa. With GDP growth of 5,1 per
cent for the year, the country’s economy was at its strongest in over two decades.
However, South Africa was not able to avoid the effects of the global meltdown in 2008,
when the country’s GDP grew by only 3,1 per cent. By June 2009, GDP had decreased by
6,4 per cent to -1,7 per cent, pulling South Africa’s economy into recession. Growth
recovered somewhat in 2010 through 2014, although it did not reach the growth targets set
by the government, and in 2017 and 2018 growth slowed considerably. The annual
compound 5-year growth rate for South Africa is 1,3 per cent, compared to 3,4 per cent for
Nigeria. By 2017, South Africa was the second largest African economy with a GDP of
US$739,4 billion (second only to Nigeria with a GDP of US$1,1 trillion) and a GNI per capita
of US$13 090 (compared to US$5 680 for Nigeria).
Certain factors make South Africa a favourable investment destination and other factors
deter investors from the country.
Positive factors include:
•Sound macroeconomic policies;
•100 per cent ownership permitted;
•A large, growing domestic market in South Africa;
•Modern transport and communication systems;
•Rich in natural resources; and
•Modern banking and financial services.
Negative factors include:
•High rates of crime and corruption;
•Weak economic growth;
•Extensive exchange controls, although these are gradually being eased;
•Major skills shortages, particularly in management roles; and
•High levels of unemployment (currently at over 27 per cent).
South African consumers enjoy a high degree of freedom to buy what they want and to
shop where they want.
In South Africa, individual entrepreneurs must judge which products and services
consumers want, and then offer these at a price the consumer is prepared and able to
pay. A complex network of organisations evolves out of the interaction between needs
and the entrepreneurs who satisfy these needs. In a market economy, this network is
termed the business world.
1.5The need-satisfying institutions of the market
economy
1.5.1Business organisations
The workings of a market economy are affected by its need-satisfying institutions,
which are the private business organisations that, for the most part, satisfy the needs of
the community. The business world therefore consists of a complex system of
interdependent organisations that mobilise the resources of a country to satisfy the
country’s needs at the risk of a loss and in the pursuit of profit.
Such are the conditions under which a private business exists in a market economy.
Under such a system, an organisation has to make a profit to be able to survive. This can
happen only if it satisfies the needs or wishes of the consumer and, hence, the
community.
By meeting the needs of the consumer, business organisations solve the
fundamental economic problem: which products and services should be produced, how
they should be produced, and for whom.
Figure 1.8 shows how businesses, as the main need-satisfying institutions under this
system, use the resources of society to produce products and services for consumers.
Figure 1.8: Products and services offered in the market system
Source: Adapted from Samuelson, P.A. & Nordhaus et al. 1980. Economics. Eleventh edition. New York:
McGraw-Hill Company, p. 41.
Consumers’ needs culminate in the demand for consumer products and services offered
on the market by businesses (in department stores, boutiques, car showrooms,
pharmacies and so on). Therefore, consumer demand helps to determine which
products and services need to be provided and for whom.
To be able to produce products and services, business organisations need resources,
so a demand arises for production factors, which are offered in the factor market by the
community. Business organisations pay salaries and wages to the community in
exchange for production factors, and consumers in turn pay for their products and
services with that money. Competition in both markets determines how the products
and services are to be produced so that the entrepreneur can continue to make a profit.
In order to make a profit, the enterprise must therefore take the initiative and accept
certain risks in mobilising the resources of the community before items can be
produced. The owner of a bicycle factory, for example, has to erect or rent a building,
install machinery, buy raw materials and components, and employ people to
manufacture bicycles as productively as possible to satisfy the needs of consumers. The
transport contractor has to transport products to places where there is a need for them.
The retailer has to present a range of products conforming to consumers’ needs in as
convenient a way as possible. A banker does not produce a physical article, but provides
a service in the form of finance placed at the disposal of manufacturers, dealers and
numerous other entrepreneurs and consumers. These are but a few examples of the
innumerable activities carried out in the business world by business organisations –
large and small, local and multinational – that play an indispensable part in South
African society.
Business organisations may be defined as those private need-satisfying
institutions of a market economy that accept risks in pursuit of profit by offering
products and services on the market to the consumer. Business organisations assume
one of a variety of forms: a sole proprietorship, a partnership, a close corporation, a
private company or a public company (as will be discussed in Chapter 3).
While a business organisation is a private enterprise (one owned by private
entrepreneurs), in a mixed-market economy there are government and non-profitseeking organisations (such as organisations for charity) that satisfy community needs
in addition to profit-seeking businesses, especially those needs that cannot be
addressed profitably by business organisations.
1.5.2Government organisations
In the discussion of the various economic systems, several principles of a market
economy were identified. One principle was the condition that government should
intervene as little as possible with market mechanisms and that when it does, it should
confine itself to the protection and creation of collective non-profit-seeking facilities
and services such as those concerned with healthcare, education, justice and defence.
The government departments responsible for such state functions may also be regarded
as need-satisfying organisations. However, because the profit motive is absent, and the
services provided are collective, such government institutions fall under the subject of
public administration rather than business management.
The discussion of the various economic systems also mentioned that the pure
market economy exists only in theory and that several mixed systems are in fact to be
found, including the South African system, which was defined as a market-oriented
economy with a high degree of state intervention. The intervention specifically indicates
the large number of government organisations in South Africa, which are also known as
state-owned enterprises (SOEs), parastatals or public corporations. Unlike the collective
systems that produce products and services on a nonprofit-seeking basis, these public
corporations offer products and services for profit, and sometimes in competition with
other businesses in the market. Sometimes these public corporations may be regarded
as business organisations, but with this difference: they are owned and controlled by
the state and not by a private entrepreneur. Eskom, Transnet and South African Airways
(SAA) are examples of such public corporations, and there are many others.
These public corporations may also be regarded as need-satisfying institutions
through which the state creates products and services believed to be of strategic,
economic or political importance to the community, especially as regards selfsufficiency in transport, energy, military equipment and armaments. Despite early
successes in privatisation (the state sold Sasol in 1979, in 1998 ACSA was privatised and
in 2003 Telkom was listed on the JSE and the New York Stock Exchange), this process
has seemed to stall more recently due, inter alia, to resistance from labour unions
concerned about job losses.
The effectiveness and efficiency of government organisations are often not
comparable to that of private organisations. For example, the state has had to bail out
state-owned enterprises like South African Airways several times in the past decade,
while the performance of others, such as Eskom, the South African Broadcasting
Corporation and Prasa is unsatisfactory. However, those that seek profits also fall within
the scope of business management.
1.5.3Non-profit-seeking organisations
Non-profit-seeking organisations are the other group of need-satisfying institutions that
offer services, and, to a lesser extent, products not provided by private enterprise or
government organisations. Amateur sports clubs, cultural associations and welfare
organisations are all examples of non-profit-seeking organisations, as are associations
of organised business such as the National African Federated Chamber of Commerce
(NAFCOC) and Business Unity South Africa (BUSA). These organisations differ from
other need-satisfying organisations in that they provide their services without seeking
profit.
The continued existence of such organisations therefore depends on the financial
support of those members of the community who require their services or from
charitable contributions. Although such organisations do not set profit-making as their
primary objective, they often function on the same basis as a business organisation,
seeking a surplus of income over expenditure, or at least a balance of income and
expenditure. These organisations – especially the larger ones – therefore employ
management principles. Despite their small share in the economy, the study of such
organisations also falls within the field of business management.
1.6The nature of business management
1.6.1Economics and business management as related sciences
A society is constantly faced with the problem of how to use its scarce resources to
satisfy its needs as efficiently as possible. Economics is a social science that studies how
humans choose different ways of using their scarce resources to produce products and
services. It is therefore a study of the economic problem and related variables, with the
improved well-being of the community as its preconceived goal. The variables that
economics studies include prices, money, income and its distribution, taxes,
productivity, government intervention and economic growth, as well as many other
economic questions affecting the well-being of a country.
Business management is an applied science that is concerned with the study of those
institutions in a particular economic system that satisfy the needs of a community. In a
mixed-market economy, as is found in South Africa, private business organisations are
therefore the main area of study.
While economics examines the entire economic system of a country, business
management limits its studies to one component of the economic system: the individual
organisation, whether it is a private business, a public corporation or, to a lesser extent,
a non-profit-seeking organisation. For example, economics examines the problem of
inflation against the background of its implications for the national economy, while
business management is more concerned with the effects of inflation on individual
businesses.
Critical thinking
Government organisations and private businesses: Servicing the needs of South Africans
In the South African economy, both government organisations and private businesses act as
society’s need-satisfying institutions.
Students often ask, ‘How is it possible that government organisations act as needsatisfying institutions?’ and ‘How is it possible for government organisations and private
businesses to service similar needs?’
The answer to the first question is that government organisations very definitely act as
need-satisfying institutions in that they provide an array of both products and services to
their citizens. In most cases, these products and services are exchanged for rates and taxes.
The key difference between government organisations and private businesses lies, however,
in the fact that private businesses seek to make profits through the fulfilment of society’s
needs, whereas this is not the case with government institutions.
Regarding the ways that government organisations and private businesses service
similar needs, there are two examples that are particularly relevant in the South African
situation.
The first example is society’s need for a safe and secure environment. South Africa has
a particularly high crime rate compared to the crime rates of other developed countries. In
response to this, both government organisations and private businesses seek to address
society’s security needs. The government does this through the provision of policing
services, an efficient judicial system and effective facilities for correctional services. In doing
this, the government seeks to address society’s needs, although not with a profit orientation.
At the same time, many business organisations provide products and services to address
the security needs of society. Examples of such products include electric fencing, burglar
alarms and security gates, while examples of services include private security services,
vehicle-tracking and short-term insurance. In contrast to the government organisations,
businesses providing these products and services do so in exchange for profits.
Another good example in South Africa is provided by the healthcare system. Both
government and private businesses seek to address society’s need for healthcare.
Government seeks to provide healthcare services to its citizens through public hospitals,
clinics and emergency services, without a focus on profit. At the same time, private
companies such as Netcare and Mediclinic seek to offer the same services, but with the goal
of providing higher-quality services in exchange for profit.
Many more examples exist in South Africa in the areas of education, transport and social
security.
1.6.2The purpose and task of business management
The discussion of the cycle of need satisfaction indicated that the primary human
endeavour is to achieve the highest possible satisfaction of needs with scarce resources.
This endeavour follows the economic principle, to which every economic system is
subject. It follows that any component of an economic system, including a business
organisation, is also subject to the economic principle. Where the individual business
organisation is concerned, this entails achieving the highest possible output with the
lowest possible input of production factors.
The purpose of business management is to produce the greatest number of units
of products or services at the lowest possible cost.
From this emerges the task of business management, which is to determine how an
organisation can achieve the highest possible output (products and services), with the
least possible input (human resources, natural resources and capital). More specifically,
the task of business management entails an examination of the factors, methods and
principles that enable a business to function as efficiently and productively as possible
in order to maximise its profits. In short, it is a study of those principles that have to be
applied to make a business organisation as profitable as possible. It may also include a
study of the environmental factors that could have an effect on the success of an
organisation, its survival or its profitability.
Examples of approaches, principles and methods studied by business
management with the purpose of making an organisation function as
productively as possible
General approaches to management methods (see Chapters 6 to 10), which have been
tested over the years, include the following:
•The mechanistic approach, introduced at the turn of the century, emphasises mass
production, especially under the management of engineers.
•The human-relations approach originated in the 1930s and emphasises the motivation
of workers.
•The contingency approach of the 1950s argues that the management approach is
prescribed by the prevailing situation.
•Strategic management, the most recent approach, makes a special study of how
management should act in an unstable environment.
Various supplementary approaches and developments, such as organisation design, the
management of change, information management, corporate culture and the management of
diversity are still being studied.
In the field of marketing management (see Chapter 13), research into experimentation
with approaches and methods has also contributed to the more productive operation of
businesses. These include the following:
The marketing concept replaced the production approach in management philosophy to
enable businesses to adjust their resources more effectively to the needs of consumers.
Market research, as an instrument of marketing philosophy, has developed many methods of
studying the needs of consumers.
Methods of studying and determining consumer habits and segmenting markets, as well as
strategic management aids, have also stimulated marketing management to higher
productivity.
Financial management (see Chapter 14) as an area of business management has also
tested many methods, especially financial ratios. The following are some examples:
•Ratios to access the financial performance of businesses;
•Capital budgets and capital-budget techniques, in particular to evaluate potential
investment possibilities;
•Approaches to dividend policy; and
•Approaches to and methods of financing growth and expansion as profitably as
possible.
In the same way, numerous methods, principles, approaches and problems in other areas of
business management (such as production and operations, purchasing, human resources
management and external relations – see Chapters 11, 12 and 15) have been researched
and tested.
The sum total of this sustained study of, and experimentation with, management
approaches and methods, and research on management problems, constitutes the body of
knowledge known as business management.
The purpose and task of business management
•The economic principle consists of the human endeavour to satisfy unlimited needs with
limited resources. All economic systems are subject to it.
•In a mixed-market economy, a business organisation as a need-satisfying institution is a
component of the economic system, and is therefore also subject to the economic
principle.
•According to the economic principle, a business organisation always has to endeavour
to obtain the highest possible output (products and services) at the least possible input
(lowest cost). This is the purpose of business management.
•The business organisation is the subject studied by business management.
•The task of business management is to examine factors, methods and principles that
enable a business organisation to maximise its profits and achieve its objectives.
The study of business management entails comprehensive and ongoing research and
the examination of management problems, the testing of approaches and principles,
experimentation with methods and techniques, and the continuous weighing up of
environmental variables. The result is an applied science that indicates how business
organisations can best be directed towards realising their objectives.
Therefore, in the case of business organisations, the economic principle is defined as
the endeavour to achieve the highest possible income in the market at the lowest
possible cost, with profit as the favourable difference between the two. This principle is
also applicable to government organisations and non-profit-seeking organisations. The
only difference is that in the case of government organisations and non-profit-seeking
organisations, the difference between inputs and outputs is not measured in profit, but
rather in terms of surplus, savings or higher productivity.
In a business organisation, the economic principle and the profit motive coincide,
making profits the driving force, and so the task of business management becomes one
of maximising profits. However, this does not mean that the task of business
management is to maximise profits at the cost of everything else, especially the wellbeing of society. In today’s business environment, the objective is rather to maximise
profits through good management and care of employees, customers, investors and
society in general.
To summarise, the task of business management is to study those factors, principles
and methods that will lead a business organisation, as a component of the prevailing
economic system, to reach its objectives. In a mixed-market economy, this primarily –
though not exclusively – means making a profit.
1.6.3Is business management an independent science?
Business management is a young subject and its scientific basis is still the subject of
lively debate. There is no easy answer to the question of whether business management
is an independent science, as there are many diverse opinions about what exactly
constitutes a science.
The most common definitions of a science emphasise different characteristics.
Business management is continually being tested in the light of these characteristics to
determine whether it merits the status of a science:
•The most outstanding characteristic of a science is a clearly distinguishable subject
of study that forms the nucleus of a discipline.21 Business management completely
satisfies this condition, particularly with regard to the business organisation which,
as a component of the market economy, is its subject of study.
•A fundamental characteristic of a science, which supplements the one mentioned
above, is that it should be independent of other sciences. As we have already pointed
out, business management has its own identifiable subject of study, and from this
point of view may be regarded as a science. However, it should be clearly
understood that a business organisation can be studied by other sciences for other
reasons. People are social animals who organise themselves into groups to fulfil
purposes that are too big or too complex for a single individual. A business
organisation comprises people who wish to attain certain personal and
organisational goals. Business organisations may also, therefore, form a subject of
study for sciences such as sociology, psychology and medicine. However, the way in
which business management views an organisation is indicated by the purpose of
the study. This is to examine those things that may guide businesses as effectively as
possible towards their objective, which is primarily to make a profit. This essential
characteristic also allows business management to qualify as a science because,
unlike other sciences, it is concerned mainly with ways of maximising the
profitability of a business.
•A third characteristic of a science is that it is a uniform, systematised body of
knowledge of facts and scientific laws, and that its laws and principles are constantly
tested in practice.22 In this regard, business management encompasses a great deal
of systematised knowledge found worldwide in the comprehensive literature on the
subject. It also contains numerous rules and principles that may successfully be
applied in practice, even though they are not as exact as those in the natural
sciences. This leads to the view that management is a normative science, which
means that it constantly endeavours to establish norms or guidelines for
management with a view to maximising profits.
•It is also said that the final purpose of a science should be to produce a generally
accepted theory. In this regard, business management does not yet satisfy the
requirements of an independent science. Because of the rapidly changing
environment in which business organisations exist, it is doubtful whether this stage
will ever be reached. It should also be borne in mind that the involvement of people
in the management process and the influence of uncontrollable variables make it
difficult, if not impossible, to explain management problems with any single uniform
theory.
While it is still debatable whether business management can be regarded as an
independent science, this examination at least provides an insight into its nature. To
summarise, business management is a young applied science that sets out to study the
ways in which a business can achieve its prime objective, which is to make a profit.
However, this does not mean that the application of management principles and
approaches should always be done in a scientific way, nor does it require that the
intuition and experience of managers be summarily dismissed. Successful management
is often regarded as an art as well as a science.
1.6.4The interfaces between business management and other
sciences
Throughout the discussion of the scientific status of business management, it was held
that the business organisation, as the subject of study, is the most important entity.
However, one should bear in mind that businesses are also studied by other disciplines
for other reasons.
Business management, in its task of studying and examining those things that help a
business to attain its goals as efficiently as possible, constitutes a young, developing
science that frequently makes use of the knowledge gathered by other disciplines on the
functioning of the business organisation, even though these disciplines may not be
interested in the profitability of organisations. In short, business science takes from
other disciplines what it can use to help businesses to accomplish their goals.
Many current management concepts originated in other sciences and now form an
integral part of the body of knowledge of business management. For example, the
concept of strategy was borrowed from military principles; sociological knowledge and
principles help explain the behaviour of an organisation; engineering principles are
applied to improve productivity in the manufacture of products and mathematical
models and computer science are used to help management make decisions.
Furthermore, advertising frequently uses psychology, the arts and communication
principles and techniques – all, of course, from the viewpoint of profitability.
Table 1.3 provides a self-explanatory exposition of the multidisciplinary nature of
business management. In view of the constantly changing environment in which
contemporary businesses operate, business management is likely to make more, rather
than less, use of other sciences in future.
Table 1.3: Interfaces between other sciences and business-management functions
1.7Classifying the study material of business
management
In order to decide on appropriate study material relating to business management, it is
useful to follow a guideline that will offer a broad basis upon which knowledge of
business management can be built. This guideline can be formed around questions that
arise in response to phenomena that influence costs or profits for the business. This is
where the task of management arises: to examine those things that will best improve
the profitability of the business organisation to ensure its success.
The various activities that management must undertake to make a business
organisation work can also be seen to constitute the field of business management:
•Markets must be researched to determine whether there is a need for a particular
product.
•Raw materials must be purchased to produce such products.
•Staff and equipment must be acquired to manufacture the products.
•Money has to be obtained to pay for the materials and the equipment, as well as to
remunerate staff.
•These often disparate activities have to be co-ordinated or managed.
To give scientific direction to the study of these interrelated activities, the total field of
business management is divided into seven functions. Each function (or management
area) comprises all aspects of a specific group of activities. (See Table 1.3 and the
discussion that follows.)
The main reason for dividing the field of business management into different
functional areas is the need to systematise the large body of knowledge. The
multidisciplinary nature of the subject also makes division necessary. The training and
skills required for the various functions are highly diverse, and on occasion each
function makes use of different disciplines to achieve its management purpose.
Financial management makes use of computer science, risk management and
accountancy concepts, while human resources management uses a great deal of
psychological knowledge and social theory.
Some degree of specialisation in a specific management function is necessary to
make management as productive as possible. In this book, however, the functions are
distinguished only for analytical purposes, to provide a better understanding of each
and to explain its relation to the others.
The function of general management includes an examination of the management
process as a whole: the planning that management has to do, the organisation that it has
to establish to carry out its plans, the leadership and motivation needed to get things
done, and the control that has to be exercised over the whole process. This requires a
survey of the different management approaches that may be adopted. General
management is the overall function through which top management develops strategies
for the whole business. It cuts through all the other functions because they are carried
out at the top level as well as in each functional area.
The operations function concerns all those activities that mobilise the resources
(such as raw materials, capital and human resources) of a business organisation to
create the finished products and services that can be distributed to meet the needs of its
customers.
The human resources function entails the management of a variety of activities
involved in driving employees within a business organisation to achieve their maximum
potential for the organisation and themselves. In so doing, this function guides
employees towards the accomplishment of the objectives and vision set out by general
management.
The marketing function is responsible for marketing the products or services of the
business. This process includes assessing the market and the needs of consumers, as
well as developing a strategy to satisfy those needs profitably.
The financial function includes the acquisition, utilisation and control of the money
that the business needs to finance its activities, raw materials and equipment in such a
way that its profits are maximised without endangering its liquidity or solvency.
The purchasing and supply function is responsible for the acquisition of all products
and materials required by the business to function profitably – raw materials,
components, tools, equipment and, in the case of wholesalers and retailers, the
inventory to be purchased. Purchasing managers have to be in contact with suppliers so
that they are aware of new products and know the prices at which products can be
bought. They also have to keep inventory up to date in order to ensure continuity of
functioning.
Ultimately, the functions form a synergistic whole that directs the business
organisation towards its goal and its objectives.
1.8The arrangement of this book
Business management comprises a broad body of knowledge. For logical flow in this
book, the body of knowledge has been divided into three parts as follows:
•Part 1: Chapters 1–5;
•Part 2: Chapters 6 –10; and
•Part 3: Chapters 11–15.
Chapter 1, the introduction to business management, has set the scene for Part 1 and
the rest of the book. Chapter 2 discusses the entrepreneur and entrepreneurship, while
Chapter 3 looks at the establishment of the business organisation in greater detail. The
environment within which a business operates is examined in Chapter 4. Chapter 5
addresses the issue of corporate social responsibility.
Part 2 of this book reviews the management process, the developments in
management theory and some approaches to management. Chapter 6 introduces
general management. Chapters 7 and 8, which examine planning and organising
respectively, are the starting point for an examination of the management process. The
nature of motivation and leadership in an organisation is discussed in Chapter 9, while
Chapter 10 deals with control, the final part of the management process.
The functional areas of a business are examined in Part 3 of the book. Chapter 11
looks at operations management, which concerns the management of the physical
production of products and services. Chapter 12 looks at how an organisation can
manage what are arguably its most important resources: its employees. Chapter 13
provides an overview of the marketing function and the public relations function of a
business. Chapter 14 discusses financial management, investment management and
financing decisions. The last chapter of Part 3, Chapter 15, provides an overview of the
purchasing and supply function, as well as the sourcing activities.
1.9Summary
This chapter has explained the business organisation’s role in society. It has also
considered the interaction between society and the business organisation as a social
process that transforms a country’s means of production so that products and services
can be produced that will satisfy the needs of society. This process was explained
in greater detail in the discussion of a business organisation as a component of the
economic system, where it was specifically shown how, as a need-satisfying institution
of the market economy, the business organisation provides for the needs of people.
Lastly, this chapter examined the task of business management.
Small business perspective
While South Africa is a relatively free economy, and entrepreneurs can generally produce
what they want for whom they want to sell to, it is not particularly easy to start a business in
South Africa. Here we highlight just three problems that South African entrepreneurs have to
deal with.
For one thing, there are several laws and regulations to comply with. The Companies Act
(No. 71 of 2008), the Consumer Protection Act (No. 68 of 2008), tax laws and regulations,
and the Basic Conditions of Employment Act (No. 75 of 1997) are but a few of the laws,
regulations and sector charters with which small businesses have to comply. It can be time
consuming and expensive to ensure compliance with all the relevant legislation and
regulation.
It may also be difficult to find financing for new business ventures, especially if the
entrepreneur does not have assets to offer as security. Banks will offer secured financing if
the entrepreneur has assets to offer as collateral, but will be reluctant to provide unsecured
lending to start-up ventures. While there are several other funding bodies, it often requires
patience and effort from the entrepreneur to go through the rigorous and bureaucratic
application processes.
The lack of skilled labour means that skilled employees come at a high cost, which may
act as a constraint to the growth and expansion of the new venture. This is just one example
of how scarce resources may constrain entrepreneurial ventures, especially in developing
countries.
Given the importance of entrepreneurs in fuelling innovation, growth and employment, it
is important for South Africa to find ways to make it easier to start and grow small
businesses. Currently, South Africa ranks 82 out of 190 countries globally on the World Bank
‘ease of doing business’ scale,23 which means that there is still a lot of improvement required
in terms of making it easier to set up and operate businesses. The establishment of a
government department focusing on small business development is a step in the right
direction, although it is not yet entirely clear how this development will benefit entrepreneurs
to start and operate small businesses.
KEY TERMS
business ethics
human resources
business management
industries
business organisation
informal sector
capital
liberal
command economy
market economy
community
market system
competition
Maslow’s hierarchy
conservative
mixed economy
consumerism
natural resources
corporate social investment
need-satisfying institution
corporate social responsibility
needs
economic principle
profit
economic problem
resources
economic system
social responsibility
employment equity
socialism
entrepreneurship
stakeholders
environmental sustainability
sustainability
formal sector
transformation
Questions for discussion
Reread the case study on page 3 and answer the following questions:
1.A rail operator is a very different type of business compared to a manufacturing
company such as a producer of, for example, processed meats. How might the
resources, transformation process and outputs of a rail operator and a processed
meats producer differ?
2.What are the factors that determine Prasa’s competitiveness?
3.During 2017 and 2018 South Africa’s economic conditions were not favourable.
What impact do you think this had on the transport industry, and on Prasa in
particular? Provide reasons for your answer.
4.In your opinion, how can Prasa turn the business around to become more
competitive?
Multiple-choice questions
1.Which of the following statements about socialism is true?
a.There is minimum state interference in markets.
b.The state owns and controls the principal industries such as communication,
health services and transportation.
c.People with businesses are free to use their resources as they choose.
d.The state assumes complete responsibility for the production and distribution
of products.
2.What is the key purpose of business management?
a.To examine the factors, methods and principles that enable a business to
function as efficiently and productively as possible to maximise profits.
b.To produce the highest number of units of products and services at the lowest
possible cost.
c.To study, understand and determine how to satisfy the needs of consumers.
d.To identify problems management may encounter and provide solutions for
effective management.
3.The description of business emphasises different elements. Which one of
following combinations is correct?
i.human activities, production
ii.human activities, production, profit
iii.human activities, production, exchange, profit
iv.production, exchange, profit
a.i
b.ii
c.iii
d.iv
4.Which of the following are contributing factors for dividing the field of business
management into different functional areas?
i.The training and skills required for the various functions are highly diverse.
ii.To give scientific direction to the study of these interrelated activities.
iii.The multidisciplinary nature of the subject.
iv.The need to systematise the large body of knowledge.
a.i, ii
b.ii, iv
c.ii, iii, iv
d.i, ii, iii, iv
5.Many micro-enterprises form part of the ________ sector.
a.formal
b.government
c.NGO
d.informal
References
1.Adapted from Makinana, A. 10 September 2018. Prasa on brink of financial collapse‚
annual report shows. TimesLive. Available
at https://www.timeslive.co.za/news/south-africa/2018-09-10-prasa-on-brink-offinancial-collapse-annual-report-shows/. [Accessed 17 October 2018]; Slabbert, A. 1
August 2018. Prasa should stop operating immediately – regulator. Moneyweb.
Available at https://www.moneyweb.co.za/news/south-africa/prasa-should-stopoperating-immediately-regulator/. [Accessed 17 October 2018].
2.GDP as at Q2 2018, calculated at constant 2010 prices, seasonally adjusted and
annualised.
3.Statistics South Africa. 2016. Annual Financial Statistics 2016. Statistical release
P0021. Available at http://www.statssa.gov.za/publications/P0021/P00212016.pdf.
[Accessed 18 October 2018].
4.Note that the definition of the informal sector specifically excludes illegal business
and activities.
5.Greve, N. 26 April 2017. Vital part of SA economy still being ignored. Fin24. Available
at https://www.fin24.com/Finweek/Business-and-economy/vital-part-of-saeconomy-still-being-ignored-20170426.
6.GNI per capita is calculated as the total GNI divided by the mid-year population.
7.The World Bank. Available
at http://data.worldbank.org/indicator/NY.GNP.PCAP.CD/countries/CN-4EXT?display=graph. [Accessed on 18 October 2018].
8.Rajgopaul, D. 2 May 2018. SA entrepreneur wins award at the World Economic
Forum. IOL Business Report. Available at https://www.iol.co.za/businessreport/entrepreneurs/sa-entrepreneur-wins-award-at-the-world-economic-forum14741301. [Accessed 18 October 2018].
9.OccupyWallStreet. n.d. Available at http://occupywallst.org/.
10.Michael Levitin. 10 June 2015. The triumph of Occupy Wall Street. The Atlantic.
Available at http://www.theatlantic.com/politics/archive/2015/06/the-triumph-ofoccupy-wall-street/395408/. [Accessed 30 July 2015].
11.OUTA. n.d. Available at http://www.outa.co.za/site/.
12.The World Bank. GDP growth (annual %). Available
at https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=ZA.
[Accessed 18 October 2018].
13.Department of Labour. 2018. Commission for Employment Equity: Annual Report
2017–2018. Available at http://www.labour.gov.za/DOL/documents/annualreports/Commission%20for%20Employment%20Equity%20Report/20172018/downloads/documents/annual-reports/employment-equity/20172018/18ceereport_amended.pdf. [Accessed 18 October 2018].
14.Dibakwane, M. 30 November 2017. Greenpeace activists stage nuclear
protest. Pretoria News. Available at https://www.iol.co.za/pretoria-news/greenpeaceactivists-stage-nuclear-protest-12205544. [Accessed 22 October 2018].
15.African Development Bank Group. 2017. News. SEFA grants US$ 1 million to a
20MW Off-Grid Rooftop Solar project in Zimbabwe. Available
at https://www.afdb.org/en/news-and-events/sefa-grants-us-1-million-to-a-20mwoff-grid-rooftop-solar-project-in-zimbabwe-16977 [Accessed 22 October 2018]; World
Economic Forum. 2018. People. Simbarashe Mhuriro. Available
at https://www.weforum.org/people/simbarashe-mhuriro.
16.Compiled from information in Qwerty Digital. 2017. The digital landscape in South
Africa 2017. Available at https://qwertydigital.co.za/wp-
content/uploads/2017/08/Digital-Statistics-in-South-Africa-2017-Report.pdf.
[Accessed 22 October 2018].
17.702. 10 October 2018. VBS is being investigated and there is progress in that regard
– Hawks. Available at http://www.702.co.za/articles/322539/vbs-is-beinginvestigated-and-there-is-progress-in-that-regard-hawks. [Accessed 22 October 2018].
18.The Heritage Foundation. 2018. Index of Economic Freedom. Available
at http://www.heritage.org/index/ranking. [Accessed 24 October 2018].
19.Adapted from Baumol, W.J. & Blinder, A.S. 2012. Economics: Principles and Policy.
Twelth international edition. Mason, OH: South-Western Cengage Learning.
20.Compiled from information available at The World Bank. Available
at http://data.worldbank.org/indicator/NY.GNP.PCAP.CD/countries/CN-4EXT?display=graph; The Heritage Foundation. 2018. Index of Economic Freedom.
Available at http://www.heritage.org/index/ranking.
21.Lucas, G.H.G. et al. 1979. Die taak van bemarkingsbestuurder. Pretoria: J.L. van
Schaik, p. 11.
22.Radel, F.E. & Reynders, H.J.J. (Eds). 1980. Inleiding tot die bedryfsekonomie. Pretoria:
J.L. van Schaik, p. 2.; Marx, F.W. & Churr, E.G. 1981. Grondbeginsels van die
bedryfsekonomie. Pretoria: HAUM, p. 24.
23.The World Bank. Doing Business. 2019. Rankings & Ease of Doing Business Score.
Available at http://www.doingbusiness.org/en/rankings. [Accessed 23 October 2018].
CHAPTER 2
Entrepreneurship
Watson Ladzani
The purpose of this chapter
This chapter examines entrepreneurship as the creative and driving force behind the
business organisation. It is the entrepreneur who decides what, how, by whom and for whom
products and services should be produced to satisfy the needs and wants of society. This
chapter examines the nature of entrepreneurship, and the role of entrepreneurs and small
businesses in the economy. In addition, it looks at the entrepreneurial process, as well as
the different ways of entering the business world: by starting a new business and growing it,
by buying an existing business and growing it, by entering into a franchise agreement or
through corporate entrepreneurship. Finally, the feasibility of new venture opportunities is
discussed.
Learning outcomes
On completion of this chapter you should be able to:
•define the term entrepreneur
•discuss the concept of entrepreneurship and the entrepreneurial process
•describe the roles of entrepreneurs and small businesses in the economy
•explain how to become an entrepreneur
•comment on the skills and resources required to become an entrepreneur
•identify and describe the different ways of entering the business world
•present recommendations regarding the choice of a business opportunity
•elaborate on what a feasibility study is and its value to the entrepreneur.
2.1Introduction
The previous chapter revealed that the science of business management examines how
to improve the performance of a business organisation, and it focused on how business
organisations transform a nation’s resources into products and services to meet the
needs and wants of its people. However, in order to understand how the business
organisation satisfies the needs and wants of a nation in a market economy, one needs
to understand the driving force behind the business organisation: the entrepreneur.
It is the entrepreneur who decides what, how, by whom and for whom products
and services should be produced. An entrepreneur is someone who starts a business
with the intention of making a profit and assumes the risk of losing all of his or her
resources if the venture fails.
Although the terms ‘entrepreneur’ and ‘entrepreneurship’ are freely used to
describe someone with a small business, or small business enterprise, however,
according to various academics and researchers, someone with a small business is not
necessarily an entrepreneur and entrepreneurship is not only applied in small business
enterprises.1
The entrepreneur is the source of one of the four main factors of production
discussed in Chapter 1: natural resources (land), human resources (labour), financial
resources (capital) and entrepreneurship. Entrepreneurship is the factor that mobilises
the other three resources (land, labour and capital) and harnesses them in different
combinations to meet the needs and wants of society.
Entrepreneurship is the process of creating and building something of value from
practically nothing in the midst of uncertainty and risk, and having the determination to
succeed against all odds.2
The process of starting a new business, of sometimes failing and sometimes
succeeding, is entrepreneurship. Entrepreneurship is constituted by those individuals in
society who use their initiative and take the risk of harnessing the factors of production
to provide products and services. The entrepreneur’s reward for taking the initiative
and taking risks is profit. The entrepreneur’s punishment for making the wrong
decisions is financial loss.
By knowing what drives entrepreneurs, and how they identify and assess business
opportunities and enter the business world, the student of business management will
have a better understanding of how business organisations function. This is essential
even if the student plans to become a manager, as managers play a key role in the
success or failure of business organisations, and need to know how the entrepreneurial
process works.
2.2Different concepts of what an entrepreneur is
The first question that arises in the quest for a scientifically based definition of the
notion of an entrepreneur concerns identity: who or what is an entrepreneur? Is the
owner of a suburban filling station, the local estate agent or the owner of a Nando’s
franchise an entrepreneur? Are there entrepreneurs in schools, government projects
and large enterprises?
There is no hard-and-fast rule here, nor is there a formal classification or register of
entrepreneurs. Moreover, scientists have different views on whom or what exactly an
entrepreneur is:
•Economists subscribe to the view that entrepreneurs combine different resources
in specific combinations to generate products and services so as to make a profit.
Their focus is on what entrepreneurs do. Entrepreneurs, to them, are people who
are driven primarily by the profit motive.
•Behaviourists (psychologists and sociologists) tend to view entrepreneurs from the
behavioural perspective. Psychologists describe entrepreneurs according to their
characteristics, for example, the achievement orientation of entrepreneurs and their
propensity towards creativity and risk-taking.
•Marxists regard entrepreneurs as exploiters.
•Corporate managers see entrepreneurs as small operators who lack the potential to
manage a large enterprise.
•Proponents of a market economy see entrepreneurs as the economic force
responsible for the prosperity of a country.
In addition, in the field of management and entrepreneurship alone, writers give
differing definitions of what an entrepreneur is. Entrepreneurs have been described as
people who:
•are creative (have the ability to produce new and original ideas in order to solve a
problem);
•are innovative (use new ideas to develop a better product, service, process or
technique);
•identify opportunities (created by the unlimited needs of people and trends that
appear in the environment);
•find resources (natural resources, human resources, financial resources and
entrepreneurship) to pursue these opportunities for personal gain (profit);
•take financial risks (run the risk of potential loss or failure of the businesses they
start);
•bring about change, growth and wealth in the economy (winning nations have
entrepreneur-driven economies);
•re-energise economies and create jobs (desperately needed in South Africa); and
•start, manage and grow sustainable small businesses (the owner of a business
starts and manages the business and re-allocates the business resources in such a
way that the business makes a profit and grows).
An entrepreneur is usually a creative person who scores high on achievement
motivation, is willing to take calculated risks and views a challenge as a
new opportunity. Although the term ‘entrepreneur’ tends to be associated with the
founding of a new business or the owning and managing of a small one, an entrepreneur
far exceeds this category and cannot only be confined to business enterprise.
The following excerpt adapted from Dollinger (1995: 8–9)3 shows that the field of
entrepreneurship is inclusive of many disciplines as follows:
•The field of entrepreneurship and new venture creation has been approached from
many different perspectives and disciplines.
•Historians document entrepreneurial activity and attempt to relate it to the major
political and economic events of the ages.
•Anthropologists see entrepreneurship in terms of the development of civilisations.
They are interested in issues such as new technology and tool use, the accumulation
of surplus capital and its effects on society, and the formulation of entrepreneurial
elites.
•Geographers try to find patterns of entrepreneurial activity based on regional and
geographic differences. Their goal is to explain these patterns in terms of the natural
and physical resources available to the entrepreneurs. They also look at patterns of
diffusion of various entrepreneurial activities: technology transfer, organisational
innovation, and values and behaviour of entrepreneurs.
•Sociologists view entrepreneurship in two distinct ways. One emphasis is on
understanding the origins of groups of entrepreneurs. Therefore, some sociologists
focus on how the values and preferences of different groups of people encourage or
inhibit entrepreneurial activity. They look at how differences in ethnic and religious
orientations influence people to become entrepreneurs. They study the relation
between family development and composition and entrepreneurship. The second
sociological focus is on entrepreneurial organisations themselves. These sociologists
study the population of organisations, the composition of this population, and its
density. They are interested in the birth rates and death rates of various types of
organisations, and the underlying reasons for the level and changes in these rates.
•Psychologists study individual entrepreneurs. They seek to understand the mind of
the entrepreneur and how the entrepreneur makes decisions. Psychologists are
interested in personality traits and the personal characteristics of entrepreneurs
and how these factors influence both the decision to be an entrepreneur and the
success of an individual entrepreneur.
2.3The renaissance of entrepreneurship
Entrepreneurs throughout the world are stirring up a revolution that is revitalising
economies because the establishment of new businesses and the growth of existing
ones are responsible for most of the products and services that are changing people’s
lives. Furthermore, entrepreneurs generate jobs. The traditional providers of job
opportunities, namely large enterprises and government organisations, have been
replaced by small businesses as the main providers of jobs.
In Europe, more than 90 per cent of businesses are small- and medium-sized
enterprises (SMEs) and they contribute more than 53 per cent to the employment
sector. In sub-Saharan African countries, SMEs contribute 90 per cent to the
employment sector4.
Worldwide, countries are debating ways and means of addressing the problems of
unemployment, poverty and social instability. Employment is closely linked to the state
of the economy. When there is no growth in the economy, fewer employment
opportunities are available. Unemployment and poverty have direct effects on the social
instability of any country such as crime, violence and all forms of social unrest.
2.4Entrepreneurship in South Africa
Growth in the South African economy has declined over the past few decades. In the
1960s, growth of the gross domestic product (GDP) averaged nearly 6 per cent per year.
During the 1980s, GDP growth decreased to 2,2 per cent, followed by no growth in the
1990s. In 2006, GDP growth averaged 4,9 per cent, but this decreased again, to -3 per
cent, in the second quarter of 2009.5 Although from 2008 to 2012 the South African
economy grew on average by just 2 per cent, in 2014 the GDP grew by just 1,5 per
cent.6 In 2016, the economic growth in South Africa was persistently low (the GDP grew
by 0,3 per cent).7 Trading Economics (2018)8 reported that GDP growth rate in South
Africa averaged 2,78 per cent from 1993 until 2018, reaching an all-time high of 7,60
per cent in the fourth quarter of 1994 and a record low of -6,10 per cent in the first
quarter of 2009.
In order to sustain and improve the economic development of the country, a growth
rate of over 7 per cent per year in real terms is needed. 9 The contribution of
entrepreneurs will be relied on for a large part of the growth needed. While it is the
combination of all businesses – small, medium and micro-enterprises (SMMEs) and
large national and international businesses – that determines the state of the economy,
it is high-potential entrepreneurs who are focused on growing their businesses who are
responsible for growth and employment creation in the economy.
There are many reasons for South Africa’s high unemployment level, but one reason
in particular is the country’s labour laws. Statistics reveal that the more flexible the
labour market is (the freer it is from government intervention), the lower the
unemployment rate is. Another significant reason for South Africa’s high unemployment
is that South Africa does not have enough businesspeople involved in small businesses
to create employment. The current interest in the phenomenon of entrepreneurship is
therefore very understandable.
Yet entrepreneurship is a scarce resource, as borne out by the results of the
Global Entrepreneurship Monitor (GEM) survey. The Total Early-stage Entrepreneurial
Activity (TEA) index is calculated based on this GEM survey, and shows the percentage
of people aged between 18 and 64 who are actively involved in starting a business or
managing a business that they wholly or partly own and that is younger than three and
a half years old. The GEM survey provides the TEA index to offer useful data on both the
extent and nature of entrepreneurial activity in South Africa. While in 2011, South
Africa ranked 29th out of 54 countries, with a TEA rate below the average rate of all
participating countries, in 2016 South Africa ranked 58th out of 65 economies in terms
of entrepreneurial participation by 25 to 34 year olds – a disappointing score that is
likely a strong contributor to South Africa’s decline in overall TEA, and is cause for grave
concern in its implications for future entrepreneurial activity in the country. 10 The
decline in South Africa’s overall TEA rate for 2016, compared to 2015, is due chiefly to
decreased entrepreneurial activity among South African men. The male TEA rate has
dropped by 31 per cent, while the female TEA rate has decreased by only 16 per cent,
relative to the 2015 figures.11 When compared with the other BRIC nations, South Africa
is by far the smallest in economic input (BRIC is an acronym that refers to a select group
of four large, developing countries: Brazil, Russia, India and China.) When South Africa
was formally invited to join the group in December 2010, the new grouping became
known as BRICS
Since GEM’s inception, the Total Early-stage Entrepreneurial Activity (TEA) index
has been one of the principal measures of entrepreneurial activity in participating
economies. It therefore provides a benchmark for cross-national comparisons as well as
longitudinal comparisons within economies. South Africa’s performance in terms of
relative position – that is, how many positions above or below the median (the middle
of a distribution) South Africa ranks – for the years 2002 to 2015. It is clear that in 2016
South Africa’s overall ranking is significantly below the median for the GEM sample, and
considerably worse than for 2015. Since 2014, TEA activity in South Africa (relative to
the GEM sample as a whole) has demonstrated a persistent downward trend but has
shown an improvement in 2017.12
The rates of all levels of early-stage entrepreneurial activity dropped significantly between
2013 (10.59%) to 2014 (6.97%), but have risen in 2017 to 10.96%. Figures for 2017 for other
sub-Saharan countries are not available.
However, South Africa has many successful entrepreneurs. Although the term
‘entrepreneur’ is associated with founding a new business or owning and managing a
small one, this does not mean that entrepreneurs are not found in large corporations. In
fact, most of South Africa’s large corporations had humble beginnings in the hands of
people who went on to become illustrious entrepreneurs. The following people are
well-known entrepreneurs in South Africa and abroad:
•Ernest Oppenheimer – started Anglo American in 1917;
•Anton Rupert – founder of Rembrandt, Remgro and Richemont;
•Raymond Ackerman – founder of Pick n Pay;
•Patrice Motsepe – African Rainbow Minerals, Armgold;
•Tokyo Sexwale – Mvelaphanda Holdings;
•Mark Shuttleworth – Thawte;
•Annetjie Theron – founder of the Annique skin care and cosmetics range;
•Bill Venter – Altech and Altron;
•Herman Mashaba – founder of Black Like Me;
•Cyril Ramaphosa – founder of Shanduka;
•Ferdinand Chauvier – developed the Kreepy Krauly pool cleaning product;
•Mark Zuckerberg – founder of Facebook;
•Richard Maponya – owner of Maponya Mall, Soweto’s first mega-regional upmarket
shopping centre, which opened in 2009;
•Dr Thabang Molefe, winner of the 2008 Shoprite/Checkers Business Entrepreneur
Woman of the Year Award;
•Basetsana Kumalo – launched her own clothing, eyewear and cosmetic range;
•Sizwe Nzima – founder of Iyeza Health, the specialist health logistics service that
delivers chronic medical services;
•Leah Molatsela – offers digital legal services to people from all over the county;
•Ronnie Apteker – founder of the first Internet service provider, Internet Solutions;
and
•Sol Kerzner –founder, chairman and CEO of Kerzner International.
An example of such an entrepreneur appears in the case study below. This case study
shows how a South African entrepreneur, Adam Ismail Ebrahim, managed to raise seed
capital to start his own business, an investment company called Oasis Group Holdings.
At first, he appointed too many employees at too high a cost, but he managed to set this
straight. In spite of many restrictive rules pertaining to investments in his market, he
managed to identify investments complying with the requirements of his clients. His
Cape Town-based business then became very profitable, and by 2008 it had two
overseas branches – one in Dubai and one in Dublin.13
CASE STUDY: Entrepreneurship in action: Exploiting restrictive rules
Buying shares in a company run by one of the finalists in the 2006 World Entrepreneur
Awards helped finalist Adam Ismail Ebrahim – CEO and CIO of Oasis Group Holdings – fund
his company.
‘In 1997 – when I realised that my time as an employee was coming to an end – I sold
shares that I had bought in Naspers a year before its listing at R1,45, for R50,’ says
Ebrahim, whose brothers, Mohamed Shaheen (chairman) and Nazeem (deputy chairman),
pooled resources with him to start an investment company.
They wanted to provide a particular service not previously offered to Muslims, both in
terms of savings and retirement. Muslims have the dilemma that their religious rules prohibit
them from benefiting from the proceeds of companies involved in alcohol, tobacco, financial
services, entertainment and pork products as well as companies that are highly leveraged.
The use of derivatives is also prohibited.
Oasis began with seed capital of R3 million, with a strong focus on developing the niche
market of investments that complied with Shariah religious law. It has since grown to be the
leader worldwide in Shariah-compliant investments. Both its global funds were rated AA by
Standard & Poor’s and its Crescent Global Fund received a five-star rating from
MorningStar.
Ebrahim, who hails from District Six, holds a BSoc (Hons) from UCT. He later studied
accounting, completed his articles at Deloitte and was seconded to the firm’s London office
in September 1986.
‘It was an interesting time, with new regulations being implemented in the financialservices sector. On top of first-hand experience of changes in the regulatory environment, I
witnessed the stock-market crash the following year,’ says Ebrahim, who gained insight into
the world of investment while witnessing the contrast between ‘absolute euphoria caused by
booming market conditions and utter depression’ when the tide turned.
He returned to South Africa in 1988 and joined Allan Gray as an analyst, but was soon
promoted to being the partner responsible for training managers. ‘Until 1996 things went
very well, and I felt that I was living my dream,’ says Ebrahim, who later found it ‘increasingly
difficult’ to get motivated by his environment.
‘When I resigned to start out on my own, Allan Gray offered to fund my business.
However, I felt that it would be inappropriate and that I wouldn’t really be independent. I
wanted the freedom to paddle my own boat, to follow my own philosophy and target
untapped markets with my own resources. Thus, we became competitors after I had eight
good years with Allan Gray, gaining confidence and an understanding of the industry.’
‘But then I made a huge mistake,’ says Ebrahim. ‘I believed people who made promises
of vast amounts of money that they’d invest in the new business. On the strength of that I
made the next mistake: I hired 16 people – six being highly paid CAs.’
‘We had no revenue, no assets, an expensive salary bill and a very expensive cost
structure – and the losses just kept mounting. To make matters worse, two weeks after
getting our first institutional client, markets were hit by the Asian crisis. I know it has since
become a sensitive image to use, but it was like a toddler taking his first steps along the
beach just when a tsunami hits … ‘.
‘But we survived – on the foundations of an investment philosophy of no volatility, which,
combined with our ethical offering, proved to be a very definite and successful niche.’
‘I fired everybody after realising they were having a ball doing nothing. We started
managing the money we did have very strictly, our performance improved, losses
disappeared and the company – and each of its operating subsidiaries – has never made a
loss again,’ says Ebrahim.
‘After having made every mistake possible, and having learnt very expensive lessons,
performance started picking up and we decided to enter the retail market, which provided the
breakthrough the company needed. People started coming to us, whereas before we had to
call on people trying to convince them to invest R300 a month. Up to 65 per cent of our sales
were based on that direct model, which has led to our having the lowest churn ratio in the
industry and proving how important personal relationships are in business. We now have 30
000 direct retail clients.’
The Oasis Crescent Equity Fund, its flagship fund, has been the best performing equity
fund since its inception in August 1998: In the fourth quarter of 2018, the fund size was 5.3
billion rand.
December 2000 was another landmark for the group, when it registered its first global
fund, the Crescent Global Equity Fund. That has since established it as the world’s best
performing Shariah-compliant equity fund.
The retail retirement business was launched in 2002, providing all investors access to
Shariah-compliant and ethical retirement savings not previously available. ‘We find that 30
per cent of our clientele aren’t Muslims,’ says Ebrahim. Oasis also launched the first
Shariah-compliant prudential unit trust in April 2005 and the first listed Shariah-compliant
property fund in November 2005.
Ebrahim ascribes the success of the business – Ebrahim received the Champion Award
for Asset Management at the 2018 GIFA Awards – to an owner-based culture and
adherence to global regulatory and ethical standards. He says the Oasis model is also built
on selling a product tailored to what people need and not so much on what they want, a
result of building up a personal relationship with a client.
Oasis has more than R25 billion of assets under management and employs 140 people
in South Africa and Ireland. Through a joint venture in Malaysia, the group has exposure to
Singapore, Indonesia and Brunei. The Oasis head office is based in Cape Town.
In February 2007, Oasis opened associate offices in Dubai. In that same year, Oasis
reached the US$4 billion mark in assets under management. In June 2007, it celebrated its
tenth birthday. In February 2008, Oasis opened its office in Dublin to further the growth of its
global portfolio-management capabilities. It continues to expand its product range.
Sources: Oasis. 2018. Quarter 4, 2018. Available at http://www.oasis.co.za/default/content.aspx?initial=true&moveto=839; Adapted from Naudé, C. 2006. Exploiting restrictive rules. Finweek, 9
November, pp. 69–70. Reprinted by permission of Gallo Images/IMAGES24.co.za/Finweek.
2.5The role of entrepreneurs and small-business
owners in society
Chapter 1 described how businesses owned and driven by entrepreneurs satisfy needs
and wants by mobilising a country’s natural, human and financial resources to produce
much-needed products and services. In the process, wealth is created for society (in the
form of jobs) and for the entrepreneur (in the form of profits). Entrepreneurial activity
is the essential source of economic growth and social development, and the key role
played by this factor of production was underestimated for many decades.
Entrepreneurship is the spark that brings the other factors of production into motion.
However, it is also imperative to realise that entrepreneurship is in turn mobilised by
the self-efficacy, creativity, skills and expectations of individuals. If the entrepreneurial
spirit is absent, the production machine does not go into action.
People with entrepreneurial talents and skills and an entrepreneurial orientation
are able to achieve more than others in mobilising productive resources by starting
enterprises that will grow. People with entrepreneurial qualities are rare and valuable.
They constitute a resource that greatly contributes to, if not causes, the production of
products and services. They set in motion the creation of employment opportunities.
There is a distinct difference between entrepreneurial businesses and some, or
perhaps even the majority of, small, medium and micro-enterprises (SMMEs), which are
not entrepreneurial. SMMEs often exist as a way of earning income that is an alternative
to working as an employee. They satisfy their owner’s need for independence or
lifestyle needs. True entrepreneurs differ dramatically from small-business
owners who are satisfied with some autonomy and earning a reasonable income for
themselves and perhaps a few employees, but who have no intention of growing and
developing their business entrepreneurially. Therefore, not all small businesses are
entrepreneurial.
Mr Ebrahim, the subject of the case study on page 49, is a true entrepreneur. He not
only started his own business in 1997, but also managed to grow it over fewer than ten
years to become a medium to large business, and he still remains entrepreneurial. He
continuously adds new products, such as the Oasis Crescent Equity Fund in 1998, the
Crescent Global Equity Fund in 2000, Oasis’s retail retirement business in 2002, and a
prudential unit trust as well as a property fund in 2005. By 2018, the company had over
40 funds including various equity, property and retirement funds.
However, while high-growth entrepreneurs are vital for any economy, this does not
mean that entrepreneurial SMMEs are not important. In South Africa, the sector
including SMMEs comprises about 95 per cent of all enterprises, accounts for almost 75
per cent of employment in the country and contributes approximately 56 per cent to the
country’s GDP.14
In the United States, small businesses employed 58,9 million people, or 47,5 per cent
of the private workforce, in 2018. Businesses with fewer than 100 employees have the
largest share of small business employment, as shown in Figure 2.1.
Figure 2.1: United States employment by business size (employees)
Source: US Small Business Administration. Office of Advocacy. 2018 Small Business Profile. Available
at https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf.
Cognisance should be taken of the fact that the definition of a small business can
vary from country to country. In South Africa, the National Small Business Amendment
Act (No. 29 of 2004) defines a small business as a company with a labour force of fewer
than 50 employees.15 In developed economies such as the United States, small
businesses are defined as businesses that employ up to 500 people.
2.6Why do entrepreneurs do what they do?
As well as examining what an entrepreneur is and what an entrepreneur does, a
succinct overview of why entrepreneurs enter the world of business will add to an
understanding of the complex concept of entrepreneurship. However, a full
understanding of why entrepreneurs do what they do has eluded researchers for many
years. Comparative studies have indicated that roughly one-third of a nation’s people
enter into business, while the other two-thirds are professionals, government
employees, employees of businesses and the unemployed. But what is it about the
entrepreneur that causes him or her to enter into the world of business?
The decision to enter into business is influenced by many variables, which differ
from country to country. However, three broad categories of reasons for individuals
initiating ventures are their traits and characteristics, their skills and
industry experience, and the opportunities arising owing to international trends
towards outsourcing.
2.6.1Entrepreneurs’ traits and characteristics
The following traits and characteristics are typical of entrepreneurs.
2.6.1.1Achievement motivation
The most researched and possibly the most essential trait of an entrepreneur
is achievement motivation. In pioneering studies by the researcher David
McClelland,16 entrepreneurs are described as people with a higher need to achieve than
people who are not entrepreneurs. Achievement motivation is characterised by actions
of intense, prolonged and repeated effort to accomplish something that is difficult. The
person with achievement motivation will also work single-mindedly towards his or her
goal and will have the determination to win and to do everything well. He or she will
enjoy competition.
Achievement motivation goes hand in hand with ambition and competitiveness.
People with a high need to achieve are attracted to jobs that challenge their skills and
their problem-solving abilities. They avoid goals that they think would be almost
impossible to achieve or ones that would guarantee success. They prefer tasks in which
the outcome depends upon their individual efforts. An entrepreneur or would-be
entrepreneur’s high need for achievement also includes the following other needs:
•The need to be personally responsible for solving problems;
•The need to set one’s own goals and reach these goals through one’s own efforts;
•The need to have feedback on the degree of success with which tasks are
accomplished;
•The need to have personal accomplishments; and
•The need to have control over one’s own time, and to use time and money
creatively (entrepreneurs who start a new business usually desire independence
and do not want to be controlled by someone else).
From the case study, it is clear that Mr Ebrahim of Oasis Group Holdings has a need for
achievement. Once he had reached his dream of becoming a partner in Allan Gray, he
realised that he had other goals to achieve and started his own business. He
demonstrated a definite need to be independent by refusing funding from his former
employer. He used his own time and money (resources) to enter a new market, which is
evidence of his ability to identify an opportunity. He wanted the freedom ‘to paddle [his]
own boat, to follow [his] own philosophy and target untapped markets with [his] own
resources’.
2.6.1.2An internal locus of control
The second significant characteristic of an entrepreneur is a strong internal locus of
control as opposed to an external locus of control. An internal locus of
control indicates a person’s need to be in charge of his or her own destiny, whereas an
external locus of control indicates that a person believes that the outcome of an event is
primarily out of his or her personal control. People with an external locus of control
regard luck and fortune, rather than personal ability and hard work, as the reasons for
success. People with a strong internal locus of control believe that the outcome of an
event is determined by their own actions. They believe that they have control over their
own behaviour, are successful in persuading and motivating other people, actively seek
relevant information and knowledge, are well informed about their careers, perform
well on skills-related tasks and process information efficiently. Luck, chance or fate is
therefore of little relevance to an entrepreneurial personality.
In the case study, Mr Ebrahim clearly acknowledged his own mistakes, including
believing people’s promises and hiring a workforce that was too expensive. He took
personal control by getting rid of superfluous employees, by starting to manage the
company’s money personally and by initiating an investment policy of no volatility.
2.6.1.3Innovation and creativity
Successful entrepreneurs and owners of small businesses are innovative and
creative. Innovation helps existing businesses to improve the way their products and
services are made and delivered, or to introduce entirely new ones to the market.
Entrepreneurs identify opportunities in the marketplace and visualise creative new
ways to take advantage of them. Innovation is usually included in any definition of
creativity. Although not all entrepreneurs develop new products or services, or discover
new resources, every person who establishes an enterprise, and who adds value and
ensures that an enterprise continues to exist (thereby developing job opportunities) is
involved in economic creation.
Creativity refers to the creation of something new – for example, the creation of a
new business by developing a new product or service, building an organisation by
financial manipulation, reshaping an existing business, or creating a business that will
survive on its own and generate a financial fortune as testimony to the entrepreneur’s
skill. Basically, creativity involves new ideas, and any application of these new ideas is
based on innovation.
However, as well as involving the identification of opportunities and solutions,
creativity can also involve the adjustment or refinement of existing procedures or
products. Although entrepreneurs understand the importance of innovation, they often
view the risk and the high investment that the development of innovative products or
services requires as being out of proportion to the potential profit. This explains why
entrepreneurs often creatively adapt innovations of competitors by, for example,
product adjustments, imaginative marketing and client service. Thus, their creativity
finds expression on the continuum of innovation and adaptation.
From the case study, it follows that Mr Ebrahim had the ability to be innovative. He
developed a savings and retirement service, an equity fund, a prudential unit trust and a
property fund not previously offered to a particular target market, namely Muslim
people. By ensuring compliance to Shariah religious laws (which prohibit Muslim
people from benefiting from the proceeds of companies involved in alcohol, tobacco,
financial services, entertainment, pork products, high-leverage operations and the use
of derivatives), he made it possible for this target market to save and invest for
retirement.
2.6.1.4Risk-taking
Most researchers agree that entrepreneurial behaviour involves the taking of risks in
one way or another. In the business world, many variables such as interest rates,
currency fluctuations, new laws and so on are beyond the control of the entrepreneur.
The successful entrepreneur correctly interprets the risk situation and then determines
actions that will minimise the risk; he or she does not take chances, but sometimes feels
it is necessary to take calculated risks. Unsuccessful entrepreneurs, in contrast, do not
take any risks, or they take expensive, impulsive decisions that they do not think
through. Entrepreneurs investigate the critical variables of the situation and calculate
the probable results before they take decisions. Successful entrepreneurs avoid
opportunities where there is a high probability that they will be unsuccessful,
regardless of the reward.
Entrepreneurs manage the risk of their enterprises by accepting control and being
involved in the basic aspects of the enterprise. They control their enterprises by getting
access to information. They reduce their exposure to financial loss by involving
investors, often with the risk of losing control. They shorten the time between the
conceptualisation of an idea and availability of the product or service in the market.
This is one way of limiting the risk of competition.
The conclusion can be drawn that, before embarking on a venture, successful
entrepreneurs take calculated risks based on applicable research, the analysis of
information and the investigation of the probable results of an opportunity. As part of
this process, they undertake tasks such as feasibility studies, market research, and
research and development.
In the case study, Mr Ebrahim knew that he had experience in the business that he
planned to pursue. He was also willing to invest his own money (by the sale of his
shares in another company) as well as money provided by his brothers (who were to
become shareholders in the business). He determined the cost, his available funds and
his own knowledge before starting the business. Yet this was not sufficient proof that
the business would be a success. He first had to learn various other lessons in the
business before he became successful. The establishment of any business involves some
risks. Personal mistakes, as well as environmental factors such as volatile financial
markets, contributed to the risks of Oasis Group Holdings, but Mr Ebrahim overcame
them through entrepreneurial skills and knowledge of the industry.
2.6.1.5Other traits
The other traits of entrepreneurs include high levels of energy, confidence, future
orientation, optimism, the desire for feedback, high tolerance for ambiguity,
flexibility/adaptability, passion, commitment and determination, opportunity
orientation and motivation to excel.
2.6.2Entrepreneurs’ skills and industry experience
Some people can exploit opportunities more successfully than others. Skills and
knowledge, an identified opportunity and the quest for independence are among the
most significant reasons for people becoming entrepreneurs. Experience, training and
education in a specific field contribute to the success of an entrepreneur in identifying
an opportunity, establishing a business and managing it.
Job termination and job dissatisfaction can also lead people to become
entrepreneurs. In South Africa, the experience of being unemployed may trigger some
people into becoming entrepreneurs. These entrepreneurs are known as necessity
entrepreneurs and are usually less successful than opportunity entrepreneurs.
The 2016/2017 GEM South Africa Report17 describes necessity- and opportunitybased early-stage entrepreneurial activity as follows:
•Necessity-based early-stage entrepreneurial activity: This is defined as the
percentage of those involved in early-stage entrepreneurial activity who claim to be
driven by necessity (having no better choice for work) as opposed to opportunity.
This is also described as survivalist-driven motivation.
•Opportunity-based early-stage entrepreneurial activity: This is the percentage of
those involved in early-stage entrepreneurial activity driven purely or partly by
opportunity, as opposed to finding no other option for work. This includes taking
advantage of a business opportunity or having a job but seeking a better
opportunity.
Entrepreneurship is not necessarily an opportunity for the unemployed because only a
few unemployed people have the four main factors of production: natural resources
(land), human resources (labour), financial resources (capital) and entrepreneurship.
Experience, access to resources and an identified opportunity (which usually comes
with experience and exposure in business) are essential for successful
entrepreneurship. For example, Mr Ebrahim is qualified in accounting and knew the
financial-services sector well owing to extensive exposure and employment in it for ten
years. He also had access to capital (his own savings in the form of shares and the
savings of his brothers) and, most importantly, he had the desire and ability to create a
new business instead of continuing to be employed.
2.6.3Opportunities arising owing to outsourcing
Outsourcing occurs when work is done for a company by people other than the
company’s full-time employees.18 For example, SABMiller previously used large trucks
to distribute the beer that the company brewed to customer outlets. Now the
distribution of beer has been outsourced to owner-drivers of trucks. Drivers and
employees of SABMiller were empowered to purchase trucks and set up their own
businesses. They receive contracts from SABMiller to deliver beer to clients in
demarcated areas.19
Outsourcing usually takes place when a company defines activities that can be
completed by other companies that are particularly skilled at and experienced in
completing such activities. In cases where the other company could not deliver a betterquality activity, but the same quality of activity, outsourcing would be considered if the
activity could be delivered at a lower cost.
Government departments, government organisations and large businesses
outsource many of the services and components they need. In this way, they reduce
personnel costs and gain access to special skills. In this process, once again,
entrepreneurs play a critical role. They are responsible for the formation of new
businesses, to which non-core functions are outsourced, often taking over or buying
sections of larger organisations that would otherwise have been closed down.
According to a survey conducted in the United States by the International Facility
Management Association,20 the services that are most often outsourced are (in order):
•architectural design;
•trash and waste removal;
•housekeeping;
•facility systems;
•landscape maintenance;
•property appraisals;
•major moves;
•hazardous-materials removal;
•major redesigns;
•furniture moves; and
•food services.
Outsourcing is seen as part of a company’s strategic plan. The reason for outsourcing
services, according to most of the facility managers, is to acquire specialty skills that are
unavailable in-house or are not cost-efficient to handle in-house. Furthermore, they
outsource services so that they can focus on their core competencies. Other reasons to
outsource include acquiring access to specialty tools and equipment, adding flexibility
to work fluctuations, enhancing quality and improving customer satisfaction. 21 In South
Africa, owing to labour laws and other complicated issues in the environment, human
resources functions are often outsourced.
2.6.4Other reasons for entrepreneurship
While employees of large businesses are often laid off, SMMEs continue to be
established and to grow. Retrenched employees either become self-employed or
become employed by new SMMEs that are formed when large businesses sell off some
of their sections to function as SMMEs. For example, three employees of a large mining
group that unbundled bought two mines that would have been closed down. They had
experience in the mining industry, developed a plan, took some risks, started off with a
loan, took over the operations, restructured and made some crucial changes. They have
been extremely profitable, are growing, and are in the process of buying additional
mines and providing employment to many. The worldwide privatisation of government
organisations has also resulted in employees becoming entrepreneurs.
While the brief overview above gives some of the main reasons for people becoming
entrepreneurs, it does not cover the exhaustive list that may be found in many
textbooks. It must also be remembered that entrepreneurs and owners of small
businesses come in every shape, size and colour, and from all backgrounds.
2.7The entrepreneurial process
Entrepreneurship is the process of identifying, creating or sensing an opportunity
where others do not see it, and of finding and combining resources (often owned by
someone else) to pursue the opportunity until it becomes a successful established
business. Of the thousands of business ventures that entrepreneurs launch every year,
many never get off the ground, while others have a spectacular start. Much of the
success in establishing a new business depends on how well the entrepreneur has done
his or her homework.
This is a difficult process because the range of problems and options confronting the
entrepreneur is vast, and differs from one opportunity to the next.
For example, although Holiday Inn and City Lodge compete in the same industry,
they did not evolve in the same way. Their room rates and the range of services
available to customers differ.
The options that are appropriate for one entrepreneurial venture may be completely
inappropriate for another. Entrepreneurs must make a bewildering number of decisions
– and they must make the right decisions, or their businesses will perish.
By following a scientific decision-making framework, as illustrated in Figure 2.2, the
entrepreneur has a better chance of success. This framework or entrepreneurial
process of entering the business world follows a logical sequence and clarifies many of
the questions the entrepreneur is faced with.
The entrepreneurial process involves the following steps or phases to be resolved
or worked through:
•The personal characteristics, abilities and skills of the new owner of a business
have a profound influence on the success or failure of the new venture. Before
entering the business world, any potential entrepreneur should first clarify whether
he or she has what it takes to do so.
Figure 2.2: The entrepreneurial process: A framework for decision-making about new
ventures
•Another key factor in the creation of a new venture is the question of resources, or
rather access to resources. Without access to entrepreneurship and the financial,
natural and human resources necessary for the establishment of a business, the new
venture is doomed.
•A critical aspect of the entrepreneurial process is the realistic and objective
assessment of the opportunity that the entrepreneur is pursuing.
•Once the opportunity has been identified and defined, the entrepreneur needs to
find out if it can be turned into a successful venture. This calls for a feasibility study.
•When the entrepreneur has some certainty about the feasibility of the venture, he
or she needs to compile a business plan.
•After the feasibility has been established and the resources have been acquired, the
entrepreneur must launch and manage the new business.
These phases of the entrepreneurial process can also be perceived as a framework for
decision-making. In each of the phases in the process, the entrepreneur is faced with
many questions that must be clarified before he or she can proceed to the next phase.
Yet this framework does not guarantee that a new venture will be successful. Rather,
it provides a logical sequence of steps or phases in the entrepreneurial process. In each
phase, there is a multiplicity of issues that need to be carefully assessed if the new idea
is to be implemented successfully.
Figure 2.3 summarises the dynamics of the entrepreneurial process. The
entrepreneurial process is the creation of new value through the entrepreneur
identifying new opportunities and using his or her leadership skills to build an
organisation that fits the opportunity, and attracts and manages a configuration of
resources with the focus on exploiting the opportunity.22 During this dynamic process,
the entrepreneur continuously learns through success and failure.
Figure 2.3: The dynamics of the entrepreneurial process
Source: WICKHAM, PHILIP A., STRATEGIC ENTREPRENEURSHIP, 4th Ed., ©2006. Figure 10.4, p. 228.
Reprinted by permission of Pearson Education, Inc., New York.
From this process, entrepreneurial behaviour, characteristics and/or skills that
contribute to success may become apparent.
The sections that follow offer a closer examination of the first four phases of the
entrepreneurial process.
2.7.1Skills required for entrepreneurship
A skill is simply knowledge that is demonstrated through action. Potential
entrepreneurs therefore need knowledge about the particular environments and
industries in which they want to operate, plus considerable management skills, such as
the following:
•Strategy skills involve the ability to consider the business as a whole and to
understand how it fits within its marketplace, how it can organise itself to deliver
value to its customers and the ways in which it does this more effectively and
efficiently than its competitors.
•Planning skills involve the ability to consider what the future might offer, how this
will impact on the business, and which resources and actions are necessary to
prepare for it.
•Marketing skills involve the ability to evaluate the offerings of the business and
their features, to determine how they satisfy customers’ needs and wants, and to
establish why customers find them attractive. Marketing skills also involve the
pricing, promotion and distribution of the products or services. In the case study on
page 49, Mr Ebrahim invested in a model of direct selling based on a personal
relationship with investors. This model ensured the lowest churn ratio in the
investment industry, resulting in 30 000 direct retail clients. The product was
tailored to the needs of the people and not so much to what they wanted. This was
determined by Oasis through personal relationships with clients.
•Financial skills involve the ability to manage money – to be able to keep track of
expenditure and to monitor cash flow – and to assess investments in terms of their
potential and their risks.
•Project management skills involve the ability to organise projects, to set specific
objectives, to draw up schedules and to ensure that the necessary resources are in
the right place at the right time, in the right quantity and the right quality.
•Human relations skills involve the ability to deal with people, and include
leadership skills, motivational skills and communication skills.
All of these management skills are needed in entrepreneurship, and the more
favourably a person is endowed with these skills, the greater his or her chances for
success. These skills are discussed in Parts 2 and 3 of this book.
2.7.2Resources needed to start a business
An entrepreneur must have adequate resources to start a business, or he or she must
have access to resources to be able to enter into business. In many ventures,
entrepreneurs do not necessarily want to own the resources that will enable them to
start a business, but they may seek control of the resources they use. The emphasis is
therefore not on which resources the entrepreneur owns, but rather on the access to
and control of resources he or she has.
Entrepreneurs acquire resources from the economy and transform these into needsatisfying products and services for the community. Resources are therefore the inputs
that the business combines to create the outputs it delivers to its customers. In broad
terms, there are three kinds of resources that entrepreneurs need to build their
ventures: financial resources, human resources and operating or physical resources.
An opportunity can be exploited only if the entrepreneur has money or has access to
money. Financial resources can take the form of cash, a bank overdraft, loans,
outstanding debtors or investment capital. Financial resources include basic resources
that can readily be converted into cash.
Human resources are people such as the management team, lawyers, accountants,
and technical and other consultants. Human resources are people with knowledge and
skills who contribute to the success of the venture.
Operating resources or physical resources are assets such as offices, vehicles,
equipment, raw materials and, in the case of larger small businesses, buildings,
machinery and the plant.
Prospective entrepreneurs must realise that the acquisition of resources implies
risk, especially if the expected profits and return on investments do not materialise. If
the entrepreneur has used his or her savings to finance the business or used his or her
house as security against a loan, that entrepreneur is the one who carries the risk and
who stands to lose the savings or the house if the venture is unsuccessful.
If using investors as a source of finance, prospective entrepreneurs must know that
investors always compare alternative investments with the anticipated return on the
investment and the risks involved.
Although a prospective entrepreneur may have the right experience and the right
personal traits to become an entrepreneur, he or she cannot successfully exploit an
opportunity without the necessary resources or without access to these resources. This
is the most difficult hurdle to cross in becoming the owner of a small business.
2.7.3Business opportunities
Establishing a new business usually involves an idea that the entrepreneur pursues
enthusiastically. Finding a good idea is therefore the first step in converting an
entrepreneur’s creativity into a business opportunity. The danger, however, is that the
attractiveness of the idea is often overrated. In other words, having the best idea is by
no means a guarantee of success. Unless the entrepreneur has the capacity and
capability to transform the idea into a product or service that captures a significant
share of the market, the idea is of little value.
But where do new ideas for a business start-up come from? Research in both the
United States and other countries points to the fact that prior work experience, an
understanding of the industry and knowledge of the market account for most new
venture ideas. For example, in the case study on page 49, it was clear that Mr Ebrahim
had extensive experience in the financial services industry and he also had a very good
knowledge of the market, namely the people of the Muslim community and their needs,
as well as the Shariah restrictions that apply to them. This knowledge and experience
resulted in 70 per cent of Oasis clients being Muslims bound by Shariah.
The scientific way to search for ideas involves a thorough search of the business
environment for ideas and patterns that emerge from various environmental trends.
The business environment is examined in more detail in Chapter 4.
2.7.3.1New venture ideas
The environment referred to includes everything that happens around the
entrepreneur. Trends in the environment include economic, political and social trends,
fashions that change over time, new ways in which products are distributed, new
services that are offered and so on.
Topical trends in South Africa include economic and social trends:
•When the exchange rate favours foreigners (that is when the rand is weak against
the dollar, pound and euro), this makes South Africa a very attractive tourist
destination and most activities associated with tourism could provide
entrepreneurial opportunities.
•The high unemployment rate combined with a police force that appears incapable
of enforcing the law results in violent crime being rampant in South Africa. This fact
threatens, for example, foreign investment and tourism, but offers many ideas and
opportunities for the protection of individuals and their property. It has resulted in a
high demand for the services of businesses that install burglar bars, security fences,
security gates, alarm systems and security services such as guards.
•Changing social trends over the past decade have contributed to changing food
consumption and distribution patterns, and the outcome is a proliferation of fastfood outlets and pubs.
•Among the new services that have sprung up in the wake of privatisation of
government organisations are mail and courier services.
In searching the environment for entrepreneurial ideas, entrepreneurs must remember
that industries, like fashions, go through various life-cycle stages, as Figure 2.4
illustrates.
Figure 2.4: The life-cycle stages of industries
Source: Adapted from Ryan, J.D. 1989. Small Business: An Entrepreneur’s Business Plan. Second
edition. Mason, OH: South-Western Cengage, p. 32.
Virtually everything changes according to a life cycle, going through the stages of
introduction (embryo), growth, maturity and decline. When examining a new venture
idea, it is important to know which stage the relevant industry is in, because a different
strategy is needed for each stage.
Industries in the maturity stage are, for example, very competitive, resulting in high
marketing costs. It is clear from the life-cycle diagram that the car (automobile)
industry as a whole is very mature. Nonetheless, some of its segments are in a
developing phase, for example, mini-vans, sports models and upmarket imports.
Convertibles are back in fashion, and in the suburbs young mothers drive around in 4 ×
4s. Despite increasing traffic jams, people still drive, and the cars they drive reflect
changing lifestyles.
Where can you find gaps in the life-cycle diagram in Figure 2.4? Ideas can be
generated at any point in the life-cycle stages of industries. They may emerge even in
those industries that fall into the decline category. This is evident from the revival of
cigar smoking. There is even a magazine in South Africa that specifically targets cigar
smokers. In addition, hula hoops are making a comeback.
South African industries can also be classified into the categories that appear in
Figure 2.4, but prospective entrepreneurs should take a close look at the following
industries, which could, in the African landscape, be labelled growth industries:
•Education. The government’s main priority is to educate all South Africans. Proof
of this is the fact that the budget for education comprises the largest portion of the
annual budget. The importance of education, combined with the inability of
government to reach its educational objectives, has resulted in many opportunities
in private education, from elementary education to technical and tertiary education.
•Healthcare. Most government hospitals perform poorly. Thus, numerous
opportunities exist for entrepreneurs to start healthcare ventures, especially home
healthcare. In addition, opportunities such as the development of generic medicine
and other healthcare products can be pursued.
•Tourism. This has the potential to provide thousands of new jobs. Very little startup capital is needed to become a tour guide, for example, or to establish a bed-andbreakfast in an existing personal residence. South Africa is becoming a destination
for international conferences and sporting events, which opens up many
opportunities. Examples include academic conferences, visits by international sports
teams and the 2010 Soccer World Cup.
•Privatisation of government and semi-government services. Worldwide and in
South Africa, government services are being privatised. Entrepreneurs have the
opportunity to acquire these organisations or parts of them.
Other sources of ideas include advertisements, retailers, competitors, trade shows,
industry associations, contracts, consultants, patents and research institutes. The
creative ability of the prospective entrepreneur is imperative in the generation of new
ideas. A truly creative person will find useful ideas in a variety of different ways and by
various means. Ideas, however, have to be transformed into opportunities if they are to
result in the creation of small businesses.
2.7.3.2New venture opportunities
Good ideas can be turned into successful new ventures. However, a good idea is not
necessarily the same thing as a good opportunity. It may be a good idea, for example, to
freeze a swimming pool during the short South African winter to save pool chemicals
and to provide a home ice rink for children. But the idea cannot be transformed into a
new venture opportunity because research has shown that South African pool owners
do not find the idea persuasive as pool surfaces are too small. Moreover, because of the
costs involved, the idea is not feasible.
A good idea is also not necessarily a good investment opportunity. Many people tend
to become infatuated with an idea. They underestimate the difficulty involved in
developing it into a product or service that will be desirable to the market. Ultimately,
the market determines whether an idea has potential as an investment opportunity.
The following are some of the fundamental requirements for a good investment
opportunity:
•There must be a clearly defined market need for the product or service. The most
successful entrepreneurs and investors are market focused; they start with what
customers and the market wants, and they do not lose sight of this.
•The opportunity must be able to achieve a sustainable competitive advantage.
•The opportunity must have the potential to grow.
•The opportunity must be rewarding to the investor and/or the entrepreneur.
•The timing of the opportunity must be right. A window of opportunity must exist.
(For example, the window of opportunity for the delivery of a wedding cake closes
on the day of the wedding. If the wedding cake is delivered on the morning after
the wedding, it is worthless.)
Table 2.1: Advantages and disadvantages of buying an existing business
Advantages
Disadvantages
Customers will be familiar with the business
location.
The business location may be undesirable or threatened with be
undesirable.
There will be an established customer base.
The image of the business will be difficult to change.
Experienced employees will come with the
business.
Employees are inherited rather than chosen.
Planning can be based on known historical data.
There may be difficulties in changing the way the business is run
Supplier relationships will already be in place.
There may be liabilities for past business contracts.
Inventory and equipment will be in place.
The inventory and equipment may be obsolete.
Financing may be available from the owner.
Financing costs could drain the cash flow and threaten the surviv
business.
Thus, good opportunities are those that satisfy a market need, are well timed and
reward the entrepreneur.
However, generating a good idea and starting a new venture from scratch is not the
only way to enter the business world. Buying an existing business or procuring a
franchise can reduce many of the uncertainties faced when starting a business.
2.7.3.3Buying an existing business
There are several advantages to buying an existing business when compared with other
strategies for entering the business world. Since customers are used to doing business
with the company at its present address, they are likely to continue doing so once it has
been taken over by a new owner. If the business has been making money, the new
owner will break even sooner than if he or she started the business from scratch.
Planning for an ongoing business can be based on previous financial records, instead of
on projections as with a start-up business. Inventory, equipment and suppliers are
already in place, and the business is managed by employees who know from experience
how to keep the business going. In addition, it may be possible to obtain financing from
the previous owner.
If the timing of the deal occurs when the entrepreneur is ready to buy a business and
the owner needs to sell for a legitimate reason, this may be the best way of entering the
business world. There may be disadvantages, however, in buying an existing business,
as Table 2.1 shows. In addition, one cannot simply buy an existing business in the hope
that it is or will be an ongoing success. The business remains an opportunity for which a
feasibility analysis will be necessary.
2.7.3.4Franchising
Another way of entering the business world is through the acquisition of a franchise.
The franchise concept gives an entrepreneur the opportunity of starting a business that
has been proven in the marketplace. The entrepreneur then becomes a franchisee.
The franchisor gives the franchisee the right to operate a business, using the franchise
company’s name, products and systems. In return, the franchisee pays the franchise
company for this right on an ongoing basis.
However, while the franchisor is an entrepreneur, it is not correct to view
the franchisee as an entrepreneur who possibly initiates innovative ideas in the
franchise system. Franchisees do not have the freedom to experiment, operate and
market their businesses based on their own vision of how things should be done.
Instead, they must usually adhere strictly to the plans of the franchisor. However, a
recent study proved that franchisees do show an entrepreneurial orientation in certain
situations, such as multiple-outlet franchisees.23 Franchisors in many sectors have
recognised the benefit of multiple-unit franchisees24 and this is seen as an
entrepreneurial continuation of the franchise trend.
Franchisors usually fall in the medium-sized to large business category, as the more
successful franchisors usually manage large numbers of franchises as part of their
business, apart from the overall management of the franchise group.
Franchising is an ideal model for the business support services industry. According
to the Franchise Association of South Africa (FASA), South Africa has 625 franchised
systems operating about 39 000 outlets and 17 franchise business sectors. It
contributes around 12,5 per cent to the GDP of South Africa.25
Australia, on the other hand, has approximately 1 025 business format franchisors
and nearly 70 000 units operating, and the UK has 809 franchise structures and 383 000
people employed by franchising.26
In South Africa, most reputable franchises are registered with the Franchise
Association of South Africa. The purpose of this organisation is to ensure that
franchising in South Africa is a quality concept that can enable entrepreneurs to start
new businesses. FASA is an excellent source of information on franchises.
2.7.3.5Corporate entrepreneurship
Corporate entrepreneurship (also known as intrapreneurship) is entrepreneurship in
an existing business. It happens when a person or team develops a new corporate
business within a business through identifying a new opportunity or business idea.
Corporate entrepreneurship is a method by which a corporation or large business
introduces new and diversified products or services to an existing business. This is done
through internal processes and by using the corporation’s resources. Corporate
entrepreneurship creates opportunities for a corporation to diversify, as well as for the
creation of new industries. In addition, corporate entrepreneurship enables investment
and profits through the establishment of new businesses within a business.
Corporate entrepreneurs are also valuable wealth creators in an economy. The
advantage of new businesses established in this manner is that sufficient funding or
seed capital is usually available for the capital-intensive establishment phase and the
growth phase that follows.
The case study on page 66 illustrates two women entrepreneurs who have become
symbols of change in their profession. They started their own civil engineering business.
This was breaking the norms and defying the odds as they showed courage and
determination to enter a male-dominated market. They learnt the harsh realities of
running their own business as opposed to working in a corporate environment. Some of
the lessons they have learnt include the value of a support structure, financial
management skills, the art of perseverance, hard work and resolute determination.
What is important for them is that they are creating jobs and making a difference in
people’s lives.
2.7.4The feasibility of the idea or opportunity
Many small businesses result from an idea that has been converted into a useful
application. Ideas have little value until they are converted into new products, services
or processes. However, as was discussed in previous sections, not all ideas can be
converted into feasible ventures. An idea must therefore be subjected to a feasibility test
to prove that it has value. Aspiring entrepreneurs often find that the idea has already
been developed or that competitors already exist. The same applies to opportunities
that entrepreneurs may recognise. The entrepreneur should therefore also do a
feasibility analysis of any apparent opportunity.
CASE STUDY: Two black South African women make waves as entrepreneurial
engineers
While more than 50 per cent of women have left the engineering sector since 2015, these
two women are determined to continue breaking the norms and defying the odds. Earlier this
year, it was reported that many women engineers have left the industry because of the
gender bias they experienced. But this is not the case for Lusanda Tyebileyo, 32, and Lerato
Kotane, 30, who symbolise change in their profession. In South Africa, only 11 per cent of
civil engineers are women, and few of these are black women. Tyebileyo and Kotane
possess remarkable fortitude in their determination to succeed. The two women are the
founders and directors of the Tisang Group, a 100 per cent black-women owned general
building and civil construction company.
Engineering is a tough profession for any one. ‘In my first year of engineering, a lecturer
told the class: “Only one in two of you will graduate”,’ recalls Tyebileyo. Growing up in a
male-dominated household with four brothers and her father, Tyebileyo learned early on to
stand on her own two feet. ‘My thinking has always been “I can do what boys can do” so the
fact that engineering is a male-dominated profession didn’t daunt me. My father encouraged
me and my mom knew I was as stubborn as my father!’ Tyebileyo then pursued her dream
at Wits University. It was here that she met her entrepreneurial partner, Kotane. Kotane
admits that she had considered a career in fashion design or architecture before settling on
engineering. ‘The fact that I had such good grades in maths and science led my parents to
question my initial career choice,’ says Kotane. ‘To this day I am grateful for their guidance. I
would not trade these past 10 years for anything; nothing excites me more than contributing
towards transformation and being counted among the female engineers who can make an
impact,’ says Kotane. Fresh from university, Kotane had to fight to be taken seriously as a
black woman in a white male-dominated industry. She had to work harder than her male
counterparts to prove herself, and she had to report to less qualified or junior male
counterparts.
Starting their business was tough. ‘We were very naïve,’ says Tyebileyo. ‘We understood
engineering and the construction sector quite well, but working in corporate is very different
from running your own business.’ Their efforts to win government contracts were fruitless.
‘There’s a stigma that if you are a woman and black then the road is clear and that you will
get to your destination quicker,’ says Tyebileyo. ‘But it doesn’t work that way.’ ‘You still need
to prove yourself,’ adds Kotane.
Kotane emphasises the importance of entrepreneurs having a support structure. ‘We
have also aligned ourselves with seasoned female mentors and entrepreneurs, who have
experience in the industry,’ she says. Perseverance is also key and pays off. After a lot of
hard work and resolute determination in the face of rejection, the Tisang Group landed
several projects in the power and renewable energy field. Despite their growing success, the
entrepreneurs admit that they need to continue to improve their financial management. They
are not alone in this – poor financial management is a key factor behind the high failure rate
among South Africa’s small and medium enterprises (SMEs).
It is for this reason that Kotane and Tyebikyo approached the South African Institute of
Chartered Accountants (SAICA), which is addressing this lack of financial management
capability by helping SMEs with crucial back-office accounting support and financial literacy
training. The programme focuses on two challenges in South Africa: providing relevant work
experience and skills to unemployed graduates, and addressing the high failure rate of
SMEs through providing internal controls, risk management and reporting. The project has
assisted over 120 SMEs since 2012.
To be eligible to enter the SAICA J.P. Morgan flagship programme, SMEs have to go
through a rigorous assessment process and pitch session prior to their participation to the
programme being approved. So, what sterling qualities did the selection panel see in the
Tisang Group? ‘We were focusing on the level of entrepreneurial flair that supports the
business,’ says Mandisi Nombembe, project manager for SAICA Nation Building. ‘The
company directors had an articulate strategy and a well-structured business plan to back it
up.’ ‘As a 100 per cent black-owned civil engineering business, we applaud the courage of
the two female directors in entering a male dominated market,’ adds Nombembe. Kotane is
also grateful for their guidance: ‘I would not trade these past 10 years for anything. Nothing
excites me more than contributing towards transformation and being counted among the
female engineers who can make an impact,’ she says.
These two women are no doubt great role models. They have acquired significant
experience in their individual career paths and are working on high-risk projects such as the
Kusile Power Station, the fourth largest coal-fired power station in the world and contributing
to new power generation in South Africa. More importantly, they are creating jobs and
making a difference in people’s lives.
Source: W24. 22 August 2017. Here’s how two black South African women are making waves as fab
entrepreneurial engineers. Available at https://www.w24.co.za/Work/Jobs/heres-how-two-black-southafrican-women-are-making-waves-as-fab-entrepreneurial-engineers-20170822.
[Accessed
on
12
December 2018]. Reprinted by permission of SAICA.
Even buying an existing business or recognising a franchise opportunity does not
necessarily mean that the new or existing venture will be an instant success. No matter
how promising the idea or opportunity may appear, the entrepreneur should determine
whether it is feasible as soon as possible. Doing a feasibility analysis in good time may
prevent the entrepreneur from losing valuable resources on an idea or opportunity that
in fact offers little hope of success.
A feasibility study is the collection of data that helps forecast whether an idea,
opportunity or venture will survive. The feasibility study gives the entrepreneur an
information profile that should enable him or her to take a definite decision on whether
or not to go ahead with the venture. A feasibility study is not the same as a business
plan. It precedes the business plan and consists mainly of gathering data to enable the
entrepreneur to take a decision on whether to go ahead with the idea, opportunity or
new venture. Once the feasibility of an idea has been assessed, the entrepreneur can
commit to implementing the idea or abandon the idea altogether, depending on the
outcome.
When an idea appears feasible, the entrepreneur can proceed to determine how to
make the idea work. In other words, the entrepreneur must now decide how to
translate the idea into reality. This stage entails the drawing up of a business plan.
Because of its significance to the entrepreneurial process, the business plan will be
discussed more fully in Chapter 3.
2.8Entrepreneurship and the Fourth Industrial
Revolution
The focus in today’s economy is technology and the automation of processes. The
Fourth Industrial Revolution, which includes Artificial Intelligence (AI), plays a leading
role in these processes.
Industrial Revolution
The First Industrial Revolution began in the 18th century, with the invention of the
steam engine. The power behind the Second Industrial Revolution was electricity, which
enabled mass production. In the Third Industrial Revolution electronics and
information technology were used to automate production. The Fourth Industrial
Revolution is on our doorstep. The main differences between previous revolutions and
the Fourth Industrial Revolution is the increased pace of change – breakthroughs are
happening at a rate unprecedented in history and bring with them a new scale of
disruption. Today, every industry is transforming at an accelerating speed.27 The Fourth
Industrial Revolution is characterised by key technologies such as genetics, Artificial
Intelligence, Cloud computing, nanotechnology, biotechnology, and 3-D printing.28
Entrepreneurship has a pivotal and highly important role to play in the economic
dispensation of the emerging Fourth Industrial Revolution (Industry 4.0), which is
characterised by increasing digitisation and interconnection of products, value chains
and business models. Competitiveness no longer depends solely on optimisation of own
resources, but on total inter-organisational value chain innovation and supportive
partner technologies, products, services and systems. With the aid of partners,
organisations are co-creating innovative inter-organisational value and supply chains
that operate in a local, regional and international collaborative business
ecosystem.29 The Fourth Industrial Revolution impacts on both individuals and society.
It has the potential to raise income levels and improve the quality of life for all people.
The Fourth Industrial Revolution presents a tremendous opportunity for businesses
in Africa to raise their global competitiveness and play a more important, decisive role
in shaping the future of this continent. Africa cannot wish the Fourth Industrial
Revolution away. There are investments Africa should make, for example to create a
pipeline of future talent that can embrace the age of emerging technology. African
schools, further education and vocational training should focus on science, technology,
engineering and mathematics (STEM). It is of the utmost importance for Africa and its
peoples to be fully prepared to take advantage of the powerful wave of emerging
technology that is shifting the nature of work globally. In the face of the Fourth
Industrial Revolution, Africans should embrace innovation hubs throughout the
continent. Our civil societies, academic institutions and governments are already taking
the lead in this field. They recognise that technological innovators can thrive in an
enabling ecosystem.
The Fourth Industrial Revolution however also presents challenges, one of which is
that Africa’s leading industries are labour-intensive; there is a high risk that automation
will leave hundreds of thousands of people unemployed. In South Africa alone, almost
500 000 jobs are created through mining, an industry highly prone to the introduction
of automation.30 This calls for an entrepreneurial mindset that is creative and innovative
enough to reduce unemployment rates.
Artificial Intelligence
Artificial Intelligence (AI) is a field concerned with studying the nature of intelligence by
using computers as a new and revolutionary tool to produce intelligent
behaviour.31 This field began in the late 1950s. Some authors explain AI as machine
intelligence while others regard AI as a concept broader than machine learning. AI and
machine learning are used behind the scenes to impact our everyday lives, informing
business decisions and optimising operations for some of the world’s leading
companies.
In the near future, AI will have an increasing impact on our lives. It is already here, in
a variety of ways:
•Autonomous vehicles: Autonomous vehicles are self-driving vehicles or trucks in
which human drivers do not control the operation of the vehicle. As ‘driverless’ cars,
they combine sensors and software to control, navigate and drive the vehicle.
•Social Media: Artificial intelligence already plays a significant role in this industry.
»Twitter uses AI behind the scenes to enhance their product. They process vast
amounts of data through deep neural networks in order to learn what users’
preferences are.
»Facebook draws value from a larger portion of its unstructured datasets
(created by almost 2 billion people updating their statuses 293 000 times per
minute). Most of its deep learning technology is built on the Torch platform that
focuses on deep learning technologies and neural networks.
»Instagram uses big data and AI to target advertising, and fight cyberbullying
and delete offensive comments. As the amount of content grows on the platform,
AI is critical in giving users information which will enhance the user experience,
such as the elimination of spam.
The list of AI trends in use today are inexhaustible. These trends continue to replace
people with machines and technology. A good entrepreneur should work with these
current trends rather than fight them. AI is here to stay and will continue to impact both
the small business market and big industries. Who would ever have thought you could
ask Siri questions and get accurate answers? Robotic workforce and AI medical
diagnostics are in use today.
CASE STUDY: #WAKANDAFOREVER: What black panther means for the future of
African innovation, technology and perspectives
A case study that showcases and epitomises Artificial Intelligence, Africanised thinking and
highly technological process is displayed in the film industry, in the latest movie, Wakanda Black Panther. Black Panther is a Hollywood film that reawakens African consciousness and
directly reminds us of what the power of technology can achieve. Black Panther has been a
cinematic success by all accounts. A record-breaking box office has already topped $US1
billion worldwide and is on track to be the top-grossing film in history. It is hailed by critics
and audiences alike. Enough has probably been said in the last months of 2018 about Black
Panther. It’s a film set in an incredible African world of science and technology led by an
impressive combination of black actors, all put together by a young black director. Yes, it’s a
Hollywood film. Yes, it’s a Marvel super-hero film. Yes, it’s a world-class action movie.
Perhaps not a cultural revolution. But Black Panther is a game changer.
Above all else, Black Panther is a reawakening of African consciousness that directly
reminds us what the power of representation together with the power of technology can
achieve.
TECHNOLOGICAL EXCELLENCE IS OURS TOO
The setting of Black Panther, the land of Wakanda, is full of high-rise cities and technological
and medical marvels. From infrastructure to transportation to communications to weaponry,
the film represents an incredible technological revolution. However, the reality of an African
country of that nature is probably closer than many think and realise. The world’s biggest
tech companies, Google, Facebook and Amazon have all expanded their offices and
operations across the continent. The last ten years have spawned the arrival of over 300
active and growing tech hubs and incubators. Before filmmakers, Ryan Coogler and Joe
Robert Cole imagined Black Panther, Ghana’s Kwame Nkrumah began laying the foundation
of scientific equity with his programmes. These were rooted in using science and technology
to build a continent both modern and distinctively Africa. The foundation for what Wakanda
has visually realised.
A world dependent upon African science and technology is actually at our fingertips.
Black Panther introduced so much technology on screen that surpassed the rest of the
Marvel universe of Iron Man and hammer wielding gods; next level nanotech, kinetic energy
storing suits, force-field shields, remote driving and piloting devices, handheld holographic
displays, automated medical treatment, magnetic wave transportation, active cloaking and
more. The reality is we have innovation leading the world’s next wave:
•Wits University students in Johannesburg developed an affordable brain-controlled
prosthetic hand using 3D printing.
•A group of students at Wits, Brainternet, managed to connect a human brain to the
Internet for the first time.
•LifeQ is leading the charge in non-invasive body monitoring devices.
•ArcAqua is eliminating food wastage by using ozone technology.
•South Africa’s first self-driving car trials started in 2018.
•Luno is arguably the most popular Bitcoin wallet in the world, and the easiest to use.
•Fintech startup, Zoona, is leading the charge in helping bank the unbanked with over $1
billion in transactions.
•A blockchain-based development management, code review and version control
system, EngineOne, funded by Silicon Valley VC startups across Nigeria, Kenya,
Rwanda and Ghana, is leading the next wave of fintech, edutech and legaltech
companies.
BLACK GIRLS RULE STEM
I’m not the first to say that Black Panther has been an important landmark. But perhaps the
most impactful and important part of Black Panther is that science and black women and
girls take a front seat! Shuri, King T’Challa’s teenage sister, played by Letitia Wright, is not
only the breakout star of the star-studded cast but perhaps the most influential character of
the film.
The mastermind and hero behind Wakanda’s incredible innovations, putting all other
Marvel tech experts to shame, is a girl! A black girl! An incredibly confident and sometimes
cheeky one too! The fact that such a character leads the charge of STEM (Science,
Technology, Engineering, and Mathematics) is something unlike we’ve seen before.
Shuri impacts us from her very first scene and through the movie she displays an innate
ability to mould the world’s most valuable substance, vibranium, into a catalyst for scientific
innovation. She’s the genius behind arguably the most highly-advanced society we’ve seen
on screen. Her character never tires, consistently creating and recreating, fine tuning the
source of the Black Panther’s power, protection and arsenal of tools. Shuri’s inventions are
also focused on medical innovation, transportation, communications and improving the
Wakandan way of life. Representation matters. Broadening the characters we see on
screen, especially scientists, is profoundly important.
Wakanda is a world where black women are vital and integral to every part of life. We
needed characters like Shuri to show young girls what is possible. In addition to amazing
organisations like Black Girls Code and Digital Undivided, they now have an especially
strong role model who shows how cool STEM really is. ‘It is thrilling to see how inspired
young audiences were by the spectacular technology in the film, so it’s fitting that we show
our appreciation by helping advance STEM programs for youth, especially in underserved
areas of the country, to give them the knowledge and tools to build the future they want’,
said Bob Iger, Chairman and Chief Executive Officer of the Walt Disney Company. Hubs
dedicated to STEM supported by the UN, Google, Facebook and IBM are also rising across
the continent in South Africa, Ethiopia, Ghana, Kenya, Nigeria and Uganda. Broadening the
diversity we see can only be positive, creating a notion of ‘if they can do it, so can I!’
We are Vibranium
The secret to the Black Panther and Wakanda’s strength, power and technological
capabilities is the highly coveted vibranium mineral. Vibranium is the strongest, most resilient
and most sought-after substance on the Marvel earth. In the film it’s used to make weapons,
vehicles, the energy absorbing/bulletproof Black Panther suit and other exponential
technology. Even Captain America relies on a shield made from vibranium. It’s Wakanda’s
secret sauce as they literally veil their land as a poor African country.
My interpretation of this substance is perhaps the most important theme of the film:
•Vibranium represents us.
•Vibranium is we, African people.
•Black Panther represents what happens when we harness the vibranium within
ourselves.
An untapped, under-utilised, secret resource.
What if we saw everything in ourselves as having the potential to create limitless innovations
and change? An entire society? Wakanda leapfrogs the entire world just by harnessing its
own natural resources. What if we harnessed our own?
What if we used our brightest, most creative, hard-working individuals for the uplifting of
our own selves?
Instead of replicating Silicon Valley. Instead of copy and pasting innovation from the rest
of the world. What if we took all our collective unmined excellence to build us? Black Panther
normalised that potential.
We have to be opportunity seekers
Think of this:
•By 2030, the continent will have the second largest workforce in the world.
•Africa has the world’s youngest population.
•We house nine of the top 20 fastest growing economies.
•Female entrepreneurship is highest in the world in sub-Saharan Africa at 25,9 per cent.
These insights present an opportunity for exponential growth and potential. However, the
opportunity of a lifetime only exists during the lifetime of the opportunity. The global
perception of our continent is that you shouldn’t expect growth or excellence from us. That
we can’t impact the world with technology or development. Black Panther has represented
an amazing achievement and shift. A world-class critically acclaimed uniquely African story
on a scale unseen before. Wakanda started showing us the possibilities of our continent. It’s
now up to us to actualise that story into our daily lives. Reframing our conversations, our
decisions, our motivations for a new continent for our children. Rooted in record-breaking
excellence. Afro-futuristic utopia to reality. Perhaps black excellence is an overused term,
but Black Panther’s reimagining of Africa should push us to define and live out a new African
state of being. Technological and scientific super power. A better future beckons, and it’s
closer than you think.
Until then… #WakandaForever
Source: Mutuma, M. #WakandaForever: What Black Panther means for the future of African innovation,
technology and perspectives. Available at http://www.mushambimutuma.co/wakandaforev-er-what-blackpanther-means-for-the-future-of-african-innovation-technology-and-perspectives/. [Accessed 27 October
2018]. Reprinted by permission of Mushambi Mutuma, CEO of Altivex.
2.9The small business
The concept of entrepreneurship is strongly associated with establishing or owning a
small business, so attention is drawn to the distinction between entrepreneurship and
small business by defining a small business and explaining its role in the economy.
2.9.1Defining a small business
It is difficult to formulate a universal definition of a small business because the
economies of countries differ, and people adopt particular standards for specific
purposes. South African towns typically have a variety of small businesses, such as the
local hairdressing salon, the greengrocer, the video shop and the hardware store.
An example of a small business would be a restaurant started by a woman who was
previously an employee at a different restaurant, where she learnt about the restaurant
business. She then started her own restaurant after identifying a need for a specific type
of restaurant – for example, one specialising in organic food. This owner is now satisfied
with the success of her restaurant and the income she earns from it, and has no plans or
inclination to expand or open other restaurants.
What may be considered a small business is also relative to one’s frame of reference.
A local supermarket regarded by some people as big may actually be small in
comparison with a business such as Pick n Pay. Likewise, medium and even large
businesses in South Africa may be small in comparison with their overseas
counterparts. In most countries, it is therefore accepted practice to make use of
quantitative criteria when attempting to define a small business enterprise. Examples of
quantitative criteria in defining a small business are:
•the number of employees;
•the sales volume;
•the value of the assets; and
•the market share.
In the National Small Business Amendment Act (No. 29 of 2004), micro-businesses in
the eleven different sectors are defined as businesses with five or fewer employees and
a turnover of up to R200 000. Very small businesses employ up to 10 or 20 employees,
depending on the sector. Small businesses employ up to 50 employees, and have a total
annual turnover ranging between R3 million and R32 million, depending on the sector
in which the business is classified, and with a total gross asset value ranging between
R1 million and R6 million, again depending on the sector.32 Medium-sized businesses
usually employ up to 100 or 200 people (depending on the sector), and the maximum
turnover varies from R5 million in the agricultural sector to R51 million in the
manufacturing sector, and to R64 million in the wholesale trade, commercial agents and
allied services sector.33
A comprehensive definition of a small and medium-sized enterprise (SME) and a
small, micro and medium-sized enterprise (SMME) in South Africa is therefore any
enterprise with one or more of the following characteristics:
•fewer than 200 employees;
•an annual turnover of less than R64 million;
•capital assets of less than R23 million; and
•direct managerial involvement by owners.
Oasis Group Holdings, the subject of the case study on page 49, is an example of an
entrepreneurial business that began as a small business with limited funds but that,
through the entrepreneurial flair of its owner, developed and grew to be a mediumsized to large business.
2.9.2The role of small businesses in the economy
In developed economies, the entrepreneur is recognised as a key factor in the process of
economic development. Entrepreneurs innovate, take risks and employ people. They
create markets and serve consumers by combining materials, processes and products in
new ways. They initiate change, create wealth and develop new enterprises. More
specifically, the strategic role of small business in any economy revolves around the
production of products and services, innovation, the aiding of big business and job
creation.
2.9.2.1The production of products and services
Small businesses combine the resources of society efficiently to produce products
and services for the society in which they operate. Small businesses are less inhibited by
large bureaucratic decision-making structures, and are more flexible and productive
than many large firms. In advanced economies, they not only employ the majority of the
workforce, but also produce most of the products and services.
2.9.2.2Innovation
Small businesses have been responsible for most of the innovation worldwide. Statistics
show that many scientific breakthroughs in the United States originated with small
organisations and not in the laboratories of large businesses. The following are some
examples of the new products created, developed or invented by entrepreneurs:
•photocopiers;
•jet engines;
•Insulin;
•helicopters;
•vacuum tubes;
•colour film;
•Penicillin;
•ballpoint pens;
•zips;
•personal computers; and
•Velcro.
More recently, the following technology-related products and services have been
created, developed or invented by entrepreneurs:
•cellphones;
•The Internet;
•search engines such as Google;
•microchips;
•MP3 players such as the iPod;
•Internet-safety software;
•Mxit; and
•drag-and-draw digital paint sets.
2.9.2.3The aiding of big business
Any country needs large enterprises to be able to function competitively in local and,
especially, in international markets. The Japanese mega-corporations, for example,
compete internationally as world players and have conquered markets that earn them
billions in foreign currency for domestic development. In the process, they provide
millions of local suppliers with orders. It is the efficiency of the local suppliers, however,
that enables the big corporations to compete internationally. Small businesses not only
act as suppliers to large businesses, but also distribute their products.
2.9.2.4Job creation
As was previously stated, small businesses provide many of the new job opportunities
needed by a growing population. In fact, they create jobs, whereas large corporations
are shedding jobs.
The small business is often entrepreneurially driven. It is this entrepreneurial spirit
that is in particular encountered in the smaller enterprise that is the catalyst for
economic development and job creation. Small businesses tend to stimulate competition
and thereby improve productivity.
2.10Summary
This chapter addressed the concept of entrepreneurship and the idea that the
entrepreneur is the driving force behind the business organisation. The role of
entrepreneurs in the economy was examined, as were the reasons for people becoming
entrepreneurs. Following this, the various aspects and phases of the entrepreneurial
process were explored, including an assessment of the entrepreneur’s unique abilities
and skills, access to resources, the search for opportunities and the feasibility study.
Small business perspective
There is no universal definition of a small business. What is regarded as a small business in
one country may not necessarily be the case in another country. There are however
guidelines to describe what small and medium-sized enterprises (SMEs) are. These are
quantitative and qualitative guidelines. Examples of quantitative guidelines are the number of
employees in full-time service, number of business units or branches, total number of assets
(excluding property) and annual turnover or income of the business. Qualitative guidelines
include a simple organisational structure that is independent and privately owned and
managed. The administrators and legislators of countries draw up their economic policies
according to these guidelines in order to encourage economic growth.
Small- and medium-sized enterprises are important engines for the development of rural
economies and communities in many countries of the world. Their contribution to the
economy includes economic development, job creation and employment, the promotion of
entrepreneurship and the stabilisation of communities. The percentage of enterprises to
larger organisations in many developed and developing countries is more than 95 per cent.
KEY TERMS
achievement motivation
industrial revolution
Artificial Intelligence
innovation
business
internal locus of control
business plan
job creation
calculated risks
life cycle
capital
life-cycle stages
characteristics
machine learning
corporate entrepreneurship
managing a business
creativity
marketing skills
employment
necessity entrepreneur
entrepreneur
operating resources
entrepreneurial process
opportunities
experience
opportunity entrepreneur
feasibility
outsourcing
financial resources
physical resources
franchise
small business owner
franchisee
social trends
franchisor
traits
human resources
Questions for discussion
Reread the case study on page 49 and answer the following questions:
1.What do you regard as the three main reasons for the success of Oasis Group
Holdings? Explain why you chose each reason.
2.Do you think Mr Ebrahim was an entrepreneur or an owner of a small business
after he started the business? Give reasons for your answer.
3.How do Mr Ebrahim and his company contribute to the economy of South Africa?
4.Do you think Mr Ebrahim is a necessity entrepreneur or an opportunity
entrepreneur? Give reasons for your answer.
5.Why was Mr Ebrahim’s business idea a good opportunity? Discuss and give
reasons for your answer.
6.The Fourth Industrial Revolution has both opportunities and challenges for
businesses in Africa. Discuss how the challenges should be addressed.
7.Artificial Intelligence impacts our everyday lives and informs business decisions
of some big companies. Discuss how small businesses can use Artificial Intelligence
to their advantage.
Multiple-choice questions
1.Scientists have different views on whom or what an entrepreneur is. Which one
of the following is the view of an economist?
a.The entrepreneur is an exploiter.
b.The entrepreneur is a small-business owner who lacks the potential to
manage a large company.
c.The entrepreneur combines different resources in specific combinations to
generate products and services at a profit.
d.The entrepreneur is a person with an achievement orientation and a
propensity for creativity and risk-taking.
2.There is a need to combat South Africa’s high unemployment rate of over 27 per
cent. Which one of the following statements describes a significant reason for South
Africa’s high unemployment level?
a.No business opportunities
b.No skilled and competent labour force
c.Not enough people with business and entrepreneurial abilities
d.Not enough markets for products and services.
3.The entrepreneurial process is the creation of new value through the
entrepreneur identifying new opportunities and using his or her leadership skills
to build an organisation that fits the opportunity, and attracts and manages a
configuration of resources with the focus on exploiting the opportunity. Which
option shows the order in which the entrepreneurial process occurs?
a.The opportunity, the feasibility study, the business plan, abilities and skills,
access to resources, managing the business.
b.Abilities and skills, access to resources, the opportunity, the feasibility study,
the business plan, managing the business.
c.The business plan, abilities and skills, access to resources, the opportunity, the
feasibility study, managing the business.
d.The feasibility study, the opportunity, abilities and skills, access to resources,
managing the business, the business plan.
4.The Fourth Industrial Revolution can be distinguished in many ways. Which of
the following factors does not characterise the Fourth Industrial Revolution?
a.Biotechnology
bInkjet printing
c.Cloud computing
d.Artificial Intelligence
5.There are many examples of Artificial Intelligence that impact on our lives. Which
one of the following is not associated with AI?
a.Social media
b.Live theatre
c.Instagram
d.Autonomous vehicles
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CHAPTER 3
Establishing a business
Johan Strydom
The purpose of this chapter
This chapter focuses on the different forms of enterprise or legal ownership that are
available to the entrepreneur and small business person. It covers the characteristics,
advantages and disadvantages of the sole proprietorship, the partnership, the close
corporation, the business trust, the company and co-operative societies. Each of these forms
of business is discussed in order to enable students to compare them, and make informed
decisions about the legal ownership issues of these businesses. Once the entrepreneur
knows what the available options are, he or she will be able draw up a business plan for the
new business. The basic steps in the development of a business plan are then explained.
The location factors that play a role when starting the business are also discussed here.
Learning outcomes
On completion of this chapter you should be able to:
•understand and discuss the key considerations that are applicable when a form of
business has to be chosen
•distinguish between the different forms of enterprise found in South Africa
•explain the objectives, importance and need for a business plan
•evaluate a business plan
•give an overview of a business plan
•identify the location factors and the impact of these on a business.
3.1Introduction
This chapter focuses on the different forms of enterprise that are available to the
entrepreneur. It explains the factors that should be taken into account in selecting the
appropriate form of enterprise for a particular business. The characteristics of the sole
proprietorship, the partnership, the close corporation, the company, the business trust
and the co-operative society are explained, and the relative advantages and
disadvantages of each are highlighted.
The Companies Act (No. 71 of 2008) was assented to on 8 April 2009 and took effect
on 1 May 2011. It repealed the Companies Act (No. 61 of 1973), except for Chapter XIV
which deals with winding up of Companies. The Companies Amendment Act (No. 3 of
2011) was signed into law on 20 April 2011. The Companies Regulations, 2011 and
forms under the Companies Act (No. 71 of 2008) were published on 26 April 2011.
Some very important changes have resulted from the current South African corporate
law reform, impacting on the various business forms under discussion. These changes
could affect the choice of emerging entrepreneurs significantly regarding the selection
of a business form.
An entrepreneur who is aware of the various business forms and their implications
can make an informed decision about the structure of his or her business. Once the
entrepreneur understands what the available options are, he or she can draw up a
business plan for the new business. The basic content of such a business plan and the
different issues that should be evaluated are also discussed in this chapter. In addition,
the location factors of a business are examined as these are paramount for the success
of the business.
3.2The legal form of ownership
1
3.2.1Introduction to the legal form of ownership
An entrepreneur can conduct business through various forms of enterprise. An
enterprise is an organisational structure through which business is conducted. Several
options are available to the entrepreneur. However, there are many issues that should
be considered when deciding on the form of ownership. These issues include the extent
to which the entrepreneur wants to be liable for financial and legal risk; who will have a
controlling interest in the business; and how the business will be financed.
It is clear that one of the first issues facing an entrepreneur about to enter into a
business undertaking is the selection of the type of enterprise. This decision can have a
tremendous impact on almost every aspect of the business. As a business changes over
time, a different business form may become more fitting. Therefore, knowledge of the
different enterprise forms is crucial in planning for the possible future growth, or
transfer, of a business.
Many factors may influence the entrepreneur’s decision regarding the best business.
Therefore, knowledge of the various forms of business is imperative for the
entrepreneur. Considerations include the size of the business, the nature of the
proposed business activities, the participation style, the management structure, the
financing needs, the accountability of participants, and tax and legal implications. The
key to choosing the ‘right’ form of ownership lies in understanding the features of each
enterprise and how it will influence an entrepreneur’s specific business and personal
circumstances. A characteristic of the business form that can be considered decisively
beneficial for one business may be viewed as a distinct drawback in another business.
Although, generally speaking, there is no best form of enterprise, there may well be one
form best suited to each entrepreneur’s specific circumstances.
The characteristics of each of the enterprise forms will be explained with reference
to a number of key considerations: independence, liability, control, compliance, taxation
and transferability.
3.2.2Considerations when choosing a form of enterprise
From a legal point of view, the most pertinent consideration in choosing a form of
business is whether the enterprise will have legal (or juristic) personality. A legal or
juristic person exists independently of its members. It is recognised as a legal subject
alongside natural persons or individuals. It has its own rights, assets and obligations. Its
existence is not affected by changes in its membership. This provides the business with
continuity (also known as perpetual existence). Therefore, the business could
potentially exist forever. The members are usually not liable for the debts or obligations
of the juristic person. Members enjoy limited liability and they usually stand to lose only
the capital they have contributed to the entity. Only in exceptional circumstances will
participants be held personally liable for the debts of a business that offers the benefit
of limited liability.
Limited liability means the protection afforded by the juristic person to its
members or owners in the event of it being sued. Claims are, for example, made against
a company and the assets for payment of the company debts, and not against the
personal estates of the company’s shareholders or directors or against the estates of
members of a close corporation.
However, despite the fact that limited liability is closely associated with separate
legal personality, it is not an automatic consequence of being a juristic person. An
exception to the rule that juristic personality provides limited liability is the personal
liability company. In this special type of company that is recognised by the Companies
Act (No. 71 of 2008), directors and previous directors of the company are liable for
payment of all contractual debts incurred during their terms of appointment as
directors. Conversely, despite the fact that trusts (including business trusts) are
generally not considered to be juristic persons as trust assets are held in the trustee’s
personal estate, trusts do enjoy limited liability in the sense that only the assets in the
trust estate according to the trust deed are used to settle trust debts. Although a
partnership is recognised as a ‘person’ who is eligible for registration as a vendor for
purposes of the Value Added Tax Act (No. 89 of 1991), they are not generally recognised
as juristic persons. Nevertheless, in the course of a partnership’s existence, partners can
only be held jointly liable for the debts of the business. In addition, when judgment is
taken against a partnership, sales in execution of judgment are usually affected against
partnership assets before the partners’ personal estates. If a partnership is
sequestrated, the personal estates of partners are also dealt with separately from the
partnership estate in payment of the debts of the partnership for so far as this is
possible. In other words, a (temporary) measure of restricted personal liability is
provided for in the course of the existence of a partnership despite the absence of
juristic personality.
Companies, close corporations and co-operative societies are juristic persons, while
sole proprietorships and partnerships are not. In trusts, the position is more
complicated. Generally, trusts are not viewed as juristic persons. However, in terms of
certain legislation, such as the Income Tax Act (No. 58 of 1962), the Deeds Registries Act
(No. 47 of 1937), the Transfer Duty Act (No. 40 of 1949), the Insolvency Act (No. 24 of
1936) and the Companies Act (No.71 of 2008), trusts are considered to be juristic
persons.
The extent of the liability of the business owner is a very important consideration.
Ideally, an entrepreneur would like to insulate his or her personal assets from the
business creditors so that he or she will not lose everything should the business be
unsuccessful. The members or shareholders of companies, members of close
corporations, and participants in co-operative societies are usually not liable for the
debts of the enterprise. In contrast, sole proprietors and partners are liable in their
personal capacities for the debts of the business. The trustee or beneficiary of a business
trust is, in principle, not liable for the payments of trust debts. According to South
African law, the trustee is considered to have two separate estates: one being his or her
personal estate, and one for the trust assets. Trust debts are usually paid out of the
separate trust estate only.
The degree of control or management authority the entrepreneur will be able to
exercise over the activities of the business is another factor to consider. A broad range
of options exists in this regard. A sole proprietor enjoys total management autonomy
with respect to the business he or she owns. Companies are, however, characterised by
a formal division between ownership and control. The participative management
structures of partnerships, co-operative societies and close corporations fall in between
these two. Although a business trust is administered or managed by the trustee, the
trust deed can apportion control between the trustee, the establisher of the business
trust (the founder) and the trust beneficiaries.
Also of relevance is the potential for capital acquisition. Some businesses are
extremely capital intensive and this factor may be decisive. In other businesses, capital
may be of lesser importance owing to the business activities involved. A public company
is ideally suited to raise large sums of capital. In other enterprise forms, like
partnerships, close corporations and co-operative societies, the capital is provided by a
limited number of persons and, therefore, their own financial positions are important.
Factors including the number of participants, their exposure to risk and their say in the
management play a role in financing decisions.
Compliance with legal formalities and regulations can impose a considerable
administrative and financial burden on an enterprise. The requirements for, and the
cost of, the establishment, management and dissolution of each form of enterprise
differ. Irrespective of the particular enterprise form adopted, a business can be subject
to a multitude of other legal and regulatory requirements that often depend on sizerelated factors such as turnover and number of employees. So, for example, employers
who employ more than 50 employees, or have a turnover exceeding the amount
stipulated by the Minister of Labour (currently R5 million), would have to comply (in
addition to all other applicable legislation) with the obligations imposed by the
Employment Equity Act (No. 55 of 1998), whereas other employers would be exempt.
The Companies Regulations, 2011 provide that companies and close corporations with a
turnover exceeding the amount stipulated by the Minister from time to time (currently
R5 million) must audit their financial statements unless they are specifically exempted
from doing so. Whether or not a company or a close corporation will be obliged to have
its accounting records audited further depends on its public interest score. Companies
and close corporations with a public interest score exceeding 350, or of at least 100 and
that have their financial statements internally compiled, are obliged to audit their
statements. Close corporations must audit their financial statements in the same
circumstances as in private companies. All companies and close corporations may also
subject themselves to an audit voluntarily.
Taxation is also an important consideration. All forms of business enterprises must
pay taxes. The rates for income tax, capital-gains tax and transfer duty vary depending
on the kind of taxpayer. The amount of tax to be paid depends on whether the business
is owner-operated (that is, the owner is self-employed as is the case for sole proprietors
and partnerships) or whether the business is a registered entity that has its own
separate juristic personality (that is, companies and close corporations). Value-added
tax (VAT), which is levied at a standard rate of 15 per cent, is applied irrespective of the
enterprise form.
In terms of this tax regime a smaller business pays a fixed amount annually,
irrespective of whether it had made a profit or suffered a loss in that particular financial
year. The aim of having a different tax that applies to smaller enterprises is to minimise
the cost and the administrative burden associated with smaller enterprises. A simplified
method of paying tax, turnover tax, is available upon application, for use by small or
micro-businesses, whether they operate as sole proprietors, partnerships, close
corporations, companies or co-operatives. In order to qualify, the annual turnover of the
business must not exceed R1 million per annum. This tax is payable instead of corporate
income tax, capital gains and dividends tax. If the business chooses to do so, it may
remain on the VAT system. It is also possible to register a small business as a Small
Business Corporation (SBC), which also attracts a lower rate of tax if the annual
turnover of the business is less than or equal to R20 million. The rates of turnover tax
for SBC tax rates ending on any date between 1 April 2018 and 31 March 2019 range
between zero tax for an annual turnover below R78 750 up to tax of R58 930 on
turnover exceeding R550 001, plus 28 per cent of any amount above R550 000.
Companies that do not qualify to pay the lower turnover tax rate all pay income tax
(corporate tax) at the rate of 28 per cent, except for personal service provider
companies and foreign resident companies earning income in the Republic, who are
currently taxed at a rate of 33 per cent. Specific types of companies also enjoy certain
tax benefits. Companies involved in gold mining and life insurance are taxed at a
different rate according to a formula. Depending on the type of fund, life insurance
funds are taxed at a rate between 0 and 30 per cent. Charity organisations and other
non-profit organisations that are registered as Public Benefit Organisations are
exempted from paying corporate tax. However, a non-profit organisation or nonprofit
company (NPC) does not automatically qualify for preferential tax treatment. Nonprofit
organisations can apply to the Tax Exemption Unit of the South African Revenue Service
for approval as a public benefit organisation (PBO). PBO’s, for as long as they comply
with the strict requirements in the Income Tax Act (No. 58 of 1962) to qualify as a PBO,
are exempted from paying corporate tax. Certain donations that are made by taxpayers
to businesses involved in public benefit activities are also made tax deductible.
Close corporations and co-operative societies are also liable to pay corporate tax at
this flat rate. South African-based businesses must pay corporate tax on their
worldwide income, whereas external companies based outside South Africa that
operate business in the Republic must pay tax on income derived within South Africa
only. The income tax rate for trusts, excluding special trusts, is currently set at 45 per
cent. Special trusts, like individuals, are taxed on a sliding scale ranging from 18 to 45
per cent.
Instead of the secondary tax on companies (STC), which used to be payable at a rate
of ten per cent on the net dividends distributed to members, a withholding tax on
dividends (dividend tax) is currently payable at a rate of 15 per cent on the gross
amount of all dividends.
South African branches of foreign-resident companies are exempted from paying
STC and dividends tax. Individuals are taxed on a sliding scale, with the maximum
marginal rate set at 45 per cent. Business trusts are taxed at a flat rate of 45 per cent on
the income retained in the trust.
Capital gains tax is charged on the net capital gain after certain permissible
deductions. Certain exclusions apply for individual taxpayers, including permissible
deductions in respect of gains or losses resulting from the sale of a primary residence,
retirement benefits and payments for longterm insurance. In addition, an annual
exclusion of R40 000 on the capital gain or loss is afforded to individual taxpayers, and
also to special trusts, after which the net capital gain of the individual is taxed at 18 per
cent. The tax rate for companies is 22,4 per cent and for business trusts it is 36 per cent
of the net capital gain. Transfer duty is levied on a sliding scale based on the value of
fixed property acquired by companies, close corporations and trusts. Companies and
natural persons pay transfer duty at the same rate on a sliding scale. No transfer duty is
payable in respect of property up to a value of R900 000, thereafter three per cent of
the value of property of R900 001 and above. On property above R1,25 million in value,
R10 500 plus 6 per cent for the amount exceeding R1,25 million is payable and if the
value of property exceeds R1,75 million, R40 500 plus 8 per cent of the value exceeding
R1,75 million is levied. The rate of transfer duty payable on property with a value of
greater than R2,25 million is R80 500 plus 11 per cent of the value exceeding R2,25
million. Transfer duty of R933 000 is payable along with 13 per cent for the amount
exceeding R10 million for property valued above R10 million.
Notably, updated information regarding taxation of different business forms is made
available regularly on the website of the South African Revenue
Service: www.sars.gov.za.
Many factors will influence the total income tax burden of an enterprise. For this
reason, no single enterprise form can be said to be the most advantageous from a tax
perspective. The total income tax will depend on the amount of the taxable income (or
loss) generated in the business (whether or not the enterprise is a separate taxpayer),
the tax status and taxable income of the business owners, and the extent of distributions
made to them.
It is sometimes said that double taxation arises with respect to companies and close
corporations. Although it is true that income that has already been taxed in the hands of
the company or close corporation is taxed again when it is distributed to members as
dividends or payments, the effect is offset by the specific tax rates imposed on income
and distributions respectively. The income of a sole proprietorship and a partnership is
taxed in the hands of the sole proprietor or partners.
The income retained in a business trust is taxed in the hands of the trustee as
representative taxpayer, while the beneficiaries are taxed on the income distributed to
them during the tax year. Securities transfer tax for transfer of shares in companies or
member’s interest in close corporations is currently 0,25 per cent.
The ease with which the business or the entrepreneur can be transferred should
also be considered when the most appropriate enterprise form is being selected. There
may be many reasons why an entrepreneur may wish to, or have to, transfer his or her
business or parts of it. Shares in public companies, especially if they are listed on an
exchange, are very easily transferable and the most liquid form of investment in a
business. In private companies, close corporations and co-operative societies the
transfer of an interest is dependent on the approval of the remaining participants or
members. Beneficiaries of a business trust may transfer their rights in accordance with
the trust deed. A change in membership of a partnership has the effect of terminating
the partnership.
The sections that follow will address the main characteristics of sole
proprietorships, partnerships, close corporations, companies, business trusts and cooperatives in terms of these key considerations.
CASE STUDY: Location factors that influence most forms of small businesses
When establishing a small business there is a list of aspects to consider that could mean the
difference between success and failure. This list includes the following:
•Availability of raw materials. If the small business is dependent on raw materials, it
makes sense for the business to locate near to the source of this material. Small millers
are usually found near to a farming area where maize is produced, for example. Even
large SOEs such as Eskom are dependent on the continuous supply of coal from the
coal mines near to the power stations.
•Proximity to the target market. In the convenience sector that includes fast food
franchising, it is a necessary for the business be near to its customers. Linked to this
proximity is developing customer loyalty so that customers keep coming back to buy
from the business. Small businesses are far better suited to reaching small market
segments that their larger competitors, which tend to overlook these market segments or
consider them to be unprofitable. Furthermore, using a customer-driven strategy is a
must for small businesses that lack the financial and physical resources of their larger
competitors. 2
•Availability of basic infrastructure. The availability of services such as water,
electricity and sanitation has been taken for granted, but there are indications that small
businesses need to reconsider their dependence on third-level government institutions
providing these services. More and more small business are aiming to get off the
electricity grid and to invest in their own facilities, such as power generators, to alleviate
the chronic supply problems that Eskom as a power supplier encounters.
•Economic policy. Economic policy and local government incentives may be a
motivator for selecting a certain location. In some instances, local governments have
developed trade zones where small businesses are provided with start-up assistance.
•Method of distribution. If the small business is a brick-and-mortar business, location
will be one of its most important decisions. In today’s world, technology and the
increasing dominance of e-commerce sales are impacting on the location factor. An
online retailer could be located in Cape Town but sell most of its products in Gauteng. It
can therefore be said that the more small businesses make use of e-commerce, the less
impact location may have in future. The proviso is that e-commerce must have a
dependent distribution system to deliver products bought by customers. Some of the
largest e-commerce suppliers struggle at times to provide consistent delivery
performance during promotional periods such as Black Friday, which provides a spike in
the demand for delivered products.
Critical thinking
Why is the concept of a legal or juristic personality so important in the selection of a
business format?
3.2.3The sole proprietorship
The sole proprietorship is a business that is owned and managed by one individual.
This is a very popular type of business because it is very easy and inexpensive to set up.
A sole proprietorship is not a separate legal (juristic) person. It does not exist
independently of the owner or proprietor. The lifespan of the business is linked to the
lifespan or the legal capacity of the owner. If the owner dies, or becomes insolvent or
otherwise legally incapable, this usually means the end of the business. If the business is
discontinued, even temporarily following the death or incapacity of the sole proprietor,
it may be difficult for the heir or transferee to resume the business.
There is no legal separation of the personal and business assets of the owner.
Practically, it is preferable to keep separate books in respect of the business, but all the
assets used in the business belong to the owner alone. Any profit of the business
belongs to the owner in his or her personal capacity, even if it is kept in a separate
business account or invested in business assets.
The owner does not enjoy any limitation of liability and therefore risks losing all of
his or her personal possessions if the business is unable to meet its obligations. The
owner is personally liable for all the debts and claims arising from the running of the
business. Personal creditors can claim against business assets and vice versa.
The owner has direct control and authority over the activities of the business. The
owner usually manages the business and is free to make decisions concerning the
running of the business. The business is therefore able to adjust readily to changes.
However, a sole proprietorship can, depending on the circumstances, make
exceptionally high demands on the management ability and personal freedom of the
owner. The proprietor may delegate some or all management functions or decisions to
employees or agents.
The capital-acquisition potential of the sole proprietorship depends on the owner’s
financial strength and creditability. The owner may already have sufficient assets or
could rely on debt financing (loans).
A sole proprietor may encounter difficulty in obtaining sufficient funds, especially
when the business reaches a stage of expansion. Financiers often limit their risk by
insisting on some measure of control or supervision over the business operations.
Therefore, a sole proprietor may have to relinquish authority and freedom in
exchange for funding. There are very few formalities and legal requirements for the
establishment of a sole proprietorship. As a result, it is the least expensive enterprise
form. In terms of the Consumer Protection Act (No. 68 of 2008), members of the public
are required to register the name of a sole proprietorship with the Companies and
Intellectual Property Commission. Apart from the prescriptions of the Business Names
Act (No. 27 of 1960) that a chosen business name must not infringe on the rights of
already existing businesses, there are no particular legal requirements for the
establishment, management or dissolution of a sole proprietorship.
So far as tax liability is concerned, as mentioned above, the entire income of the
business belongs to the owner even if the income is kept in the business. Accordingly,
the income is taxable in the hands of the owner as an individual taxpayer. If the business
suffers a loss, this can be set off against the owner’s taxes.
From a legal perspective, transfer of ownership of a sole proprietorship is
reasonably simple. The owner may at any time decide to sell the business, close down
the business, or transfer the business or assets to someone else. However, it may be a
problem to find a buyer. The business may be so closely associated with the persona of
the proprietor that it may be difficult to place a value on the goodwill of the business. In
some instances, the proprietor or executor may have to sell the business assets
individually at a price that compares very unfavourably to the value of the business as a
going concern. The advantages and disadvantages of a sole proprietorship are
summarised in Table 3.1.
In the course of time, it has become evident that if two or more sole owners join
forces, they are able to bring about a stronger unit because their combined financial and
other resources are then at their disposal. This has led to the development of the
partnership as another form of business available to the entrepreneur. The partnership
is possibly one of the oldest commercial institutions known to humankind and will now
be discussed.
Table 3.1: Advantages and disadvantages of a sole proprietorship
Advantages:
•It is simple to create.
•It is the least expensive way of beginning a business.
•The owner has total decision-making authority.
•There are no special legal restrictions.
•It is easy to discontinue.
Disadvantages:
•The owner is personally liable without limitation.
•Limited diversity in skills and capabilities is available.
•The owner has limited access to capital.
•There is lack of continuity.
3.2.4The partnership
In many respects, a partnership is similar to a sole proprietorship and the two business
forms share several of the same disadvantages. A partnership may be described as a
contractual relationship between two or more persons, called partners, who operate a
lawful business with the object of making a profit. Previously the number of partners
was limited to 20, but under the Companies Act (No. 71 of 2008) this restriction no
longer applies. It is, therefore, in principle, possible to have an unlimited number of
partners. This may lead to greater diversification of skills in the business. Partners may
be natural or juristic persons. This means that a company or a close corporation may be
a partner. In terms of the Consumer Protection Act (No. 68 of 2008), members of the
public are required to register the name of their partnership with the Companies and
Intellectual Property Commission.
The essential characteristics of a partnership are that each partner has to contribute
something to the partnership, the partnership must be carried on for the joint benefit of
the partners and each partner should have the expectation of sharing in the profit.
Owing to the fragility in terms of the continuation of partnerships and the risks
associated with this particular business form, a relationship of utmost good faith is
required between partners.
A partnership does not have legal (juristic) personality. The partnership, therefore,
has no separate estate from the partners, and their personal assets are exposed to the
risks of the business. The partners in their personal capacity, rather than the
partnership as such, jointly enter into all transactions or contracts. The assets
contributed to or accumulated by the partnership belong to all the partners jointly as
co-owners. The partners are also jointly liable for all the partnership debts in the course
of the partnership.
Although a partnership is not a juristic person, the law nevertheless regards a
partnership as an entity for certain limited purposes:
•Firstly, the partners may institute legal proceedings in the name of the partnership
instead of citing all the partners jointly on the summons. The partners may also be
sued in the name of the partnership, for example, ‘Moodley and partners’ or ‘Ndlazi
and Smith Financial Advisers’.
•Secondly, the law treats the partnership estate as a separate estate for purposes of
sequestration. Although the estates of the partners will also be sequestrated
simultaneously when the partnership estate is sequestrated, the partnership
creditors will have to prove their claims against the partnership estate and not
against the estates of the individual partners.
The continued existence of a partnership depends on the continued involvement of the
partners. It is also largely dependent on the legal capacity of the partners. Should a
partner be declared insolvent or mentally incapacitated, the partnership would
usually be terminated. Whenever there is any change in the member-ship of the
partnership, for example, through the death or withdrawal of a partner or the admission
of a new partner, the partnership dissolves automatically. It is, however, possible for the
remaining partners to form a new partnership. In most cases, the partnership
agreement will provide for such a partnership change between the existing partners.
During the existence of the partnership, the partners are jointly liable for all claims
against the partnership, regardless of who was responsible for bringing about the claim.
A creditor must either sue all the partners jointly or sue in the name of the partnership.
If the partnership assets are insufficient to meet the claim of the creditor, the partners
are liable for the debt out of their personal estates. The personal possessions of the
partners are, therefore, not protected against any claim. Once a partnership has been
dissolved, the partners are jointly and severally liable for partnership debts. This means
that a creditor can recover the full debt from one partner only, leaving it to the partner
who settled the debt to claim the necessary proportionate contributions from his or her
co-partners.
The partners have joint control and authority over the business. However, the
partners can adjust the control and authority aspect in their partnership agreement. For
example, one or more partners can be excluded from representing or participating in
the management of the partnership. This would, however, not necessarily exclude
liability in terms of transactions concluded by a partner who has been excluded in this
way. The principle of mutual mandate provides for liability of the partners for contracts
concluded by any partner in the name of the partnership if the transaction falls within
the scope of the partnership business. This is a form of implied authority and,
consequently, no express authority has to be given to a partner for this principle to
apply. Therefore, the partners will, during the existence of the partnership, be held
jointly liable in terms of any transaction concluded by a partner if the contract is not
outside the scope of the business. A partner who has been excluded from participating
in management who concludes a contract within the scope of the partnership will,
however, be in breach of his or her fiduciary duty to his or her co-partners.
The joint management of the partnership can lead to problems if the partners have
different opinions or work ethics. A partnership may even be terminated as a result of
the personal circumstances of its partners or their incompatibility in running the
business. In this respect, the partnership is less adaptable to changing circumstances
than a sole proprietorship. However, the partnership’s broader authority can mean
improved management ability because the business draws on the knowledge and
experience of a greater number of people. It also allows for division of labour and
specialisation, with the additional advantage that individual partners are exposed to
less pressure than a sole proprietor. A partnership usually has better capital-acquisition
potential than a sole proprietorship because there are more people who can contribute
and who can provide security for credit.
It is a requirement for a valid partnership that each partner must make an initial
contribution to the partnership. A contribution can consist of anything that has a
monetary (economic) value, including money, property, services, knowledge or skill. If
the partnership contract does not specify how the profits will be divided, the division
will be done in proportion to the value of each partner’s contribution.
A partnership is established by concluding a contract. There are no formal
requirements for setting up a partnership. A partnership contract may be concluded
orally, in writing or even tacitly (that is, through certain behaviour). However, it is
customary and preferable for the contract to be concluded in writing. The contract
makes provision for matters such as the nature and goals of the business, capital
contributions by individual partners, profit sharing, management and dissolution of the
business.
A partnership is not a separate taxpayer. As the partnership income belongs to all
the partners jointly in specific proportions, each partner is taxed individually on his or
her share of the income. The partners also deduct the partnership expenses in the same
proportion as the income. The income tax payable on each partner’s share of the
partnership income will depend on his or her tax status and other income. In general,
transfer of ownership of assets of the partnership is more complicated than in sole
proprietorship as more people are involved and the provisions of the partnership
agreement must be complied with. The partnership is automatically dissolved by the
death of the partner or change in the membership. The advantages and disadvantages of
a partnership are reflected in Table 3.2.
Table 3.2: Advantages and disadvantages of a partnership
Advantages:
•There is ease of formation.
•Diversification of skills and abilities of partners.
•Legal (juristic) and natural persons may be partners.
•There is increased opportunity for accumulation of capital.
•There are minimal legal formalities and regulation.
Disadvantages:
•The personal liability of partners for the partnership activities.
•The relative difficulty in disposing of an interest in the partnership (the partnership will terminate in any event if the
membership).
•The potential for conflict between partners.
•Lack of continuity (succession is only possible through an agreement. However, a new partnership will be formed i
Critical thinking
There is an old saying in business that you do not do business with family and friends as this
could result in difficult relationships in future. If you were to select a business format with the
option to choose between a sole enterprise and a partnership, which would you choose,
given the fact that you have rich siblings who could assist you in the financing of the
business?
3.2.5The close corporation
A close corporation has characteristics of both a partnership and a company. It has the
advantage of being a legal (or juristic) person that exists separately from its members. A
close corporation may have one or more members, but not more than ten. Juristic
persons may not be members of a close corporation, except in certain very limited
circumstances, specified in the Close Corporations Act (No. 69 of 1984), where they may
be members in the capacity of an official representative. The core characteristic of the
close corporation is that it is closed in the sense that the members both own and control
the close corporation. The interest of a member is expressed as a percentage and the
total interest of members must always amount to 100 per cent. The name of a close
corporation must end with the abbreviation ‘CC’.
As a juristic person, a close corporation has its own rights, assets and liabilities. A
close corporation has the capacity and powers of a natural person insofar as this may
apply to a juristic person. Therefore, a close corporation is even entitled to certain
fundamental rights as set out in the Constitution of the Republic of South Africa, 1996.
Because the close corporation has legal personality, its continued (perpetual)
existence is not influenced by the withdrawal or entry of members. It can also withstand
changes in the personal circumstances and legal status and capacity of its members.
The members of a close corporation are generally not liable for the debts and
liabilities of the close corporation. They enjoy limited liability. Therefore, the members’
personal assets in their private estates are not at risk of being lost in the business.
However, the Close Corporations Act (No. 69 of 1984) imposes personal liability on
members for certain violations of its provisions. Personal liability is also imposed for
carrying out the business of the corporation recklessly, fraudulently or with gross
negligence, or for abusing the juristic personality of the corporation.
The members share the management and control of a close corporation on an equal
basis. The Close Corporations Act (No. 69 of 1984) regulates the internal operation of
the close corporation. The Act provides that certain persons, such as minors or
insolvents, may not participate in the management of a close corporation. Decisions are
generally taken by majority vote, but in some specific instances, a majority of 75 per
cent or even the consent of all the members is required.
If the corporation has two or more members, they may enter into an association
agreement that alters certain aspects of the internal functioning of the corporation. An
association agreement may, for example, provide that only certain members will
participate in the management of the corporation, or that authority to conclude
contracts on behalf of the close corporation will depend on the percentage of each
member’s interest. Notwithstanding the existence of such agreement, any member of
the close corporation who contracts with a non-member is regarded as an agent who is
able to bind the close corporation to any contract, even if such a contract falls outside
the scope of business of the corporation. The close corporation will only escape liability
if the non-member knew or should reasonably have known that he or she did not have
the authority to represent the corporation. This arrangement protects third parties
contracting with the corporation, but it exposes the members of the corporation to risk.
Therefore, it is important that members are selected carefully. Any member of the close
corporation who acts without authority will be liable to the corporation as a result of his
or her breach of his or her fiduciary duties towards the close corporation. Members are
expected to carry out their duties honestly and in good faith, and not to exceed their
powers.
The capital-acquisition potential of a close corporation is higher than that of a
partnership, mainly because members may be more inclined to contribute to a
corporation knowing that they do not stand to lose more than what they have invested.
Each person who becomes a member of a close corporation must make a contribution
with a monetary (economic) value. This could be in money, property or even services in
connection with the formation of the corporation. Services are, however, not an
acceptable contribution for a new member joining an existing corporation. The amounts
a member may be inclined to contribute to a corporation need not be in direct
proportion to another member. Two members who have contributed the same amount
of money to a corporation may, for example, agree that one of them will hold a 60 per
cent member’s interest and the other a 40 per cent member’s interest. A close
corporation can also use loan capital and members are often required to bind
themselves as sureties for credit incurred by the corporation. Although this, in effect,
removes the advantage of limited liability, it enables the corporation to obtain increased
funding.
A close corporation may not make any payments to members in their capacity as
members (for example, profit distribution or repayment of contributions) unless the
solvency and liquidity tests are satisfied. The solvency test means that after payment,
the corporation’s assets must still exceed its liabilities, based on a reasonable valuation.
A corporation meets the liquidity test if before the payment is made it can pay its
creditors as payment becomes due and after the payment is made it will still be able to
pay its debts as they become payable in the ordinary course of business.
As stated above, close corporations are mainly regulated by the Close Corporations
Act (No. 69 of 1984). The legal prescriptions contained herein are not strict. A close
corporation’s sole registration document is called a founding statement. The founding
statement contains details such as the proposed name of the corporation, the nature of
the business, the personal details of members and their interests in the corporation. The
founding statement is similar to the Memorandum of Incorporation of a company.
Although a founding statement is registered, it is not open for public inspection and
nobody is deemed to know its contents. In terms of the Companies Act (No. 71 of 2008)
it is no longer possible to register new close corporations. Companies may also no
longer be converted into close corporations. Certain close corporations are also
required to comply with stricter legal requirements relating to auditing of financial
statements than others. This is very unfortunate, especially because registration
statistics evidence a tendency to incorporate close corporations rather than companies.
Of the number of close corporations registered, the figures also reveal a relatively high
subsistence rate when compared to that of all forms of companies. The Companies Act
(No. 71 of 2008) aims to make companies a more favoured option by introducing a
simpler registration process. It is envisaged that close corporations may eventually be
phased out if the simplifications introduced prove workable for smaller businesses.
The Companies Act (No. 71 of 2008) and the Companies Amendment Act (No. 3 of
2011) amended and repealed various sections of the Close Corporations Act (No. 69 of
1984). It is aimed at levelling the playing field between close corporations and private
companies. Identical regulation requirements apply to close corporations and private
companies.
The following aspects, which were previously only applied in respect of companies,
are now applicable to close corporations:
•The criteria for names and the new voluntary procedure for the reservation of
names apply.
•Close corporations are required to prepare annual financial statements within six
months of the end of the financial year to which they relate (this was previously nine
months). Annual financial statements must be audited if so required by the
Companies Regulations, 2011. In other words, whereas close corporations were
required previously only to appoint an accounting officer, certain close corporations
(in the same circumstances as in private companies) are now obliged, in addition to
this review, to have a formal audit performed on their financial statements. This
does not mean that the close corporation is exempted from the requirement in the
Close Corporations Act (No. 69 of 1984) to have an accounting officer. Affected close
corporations must abide by both pieces of legislation. Close corporations are given
the option of opting to comply with the enhanced transparency and accountability
requirements in Chapter 3 of the Companies Act (No. 71 of 2008) by appointing an
auditing committee and a secretary, and complying with the rotation requirement as
applied in companies in respect of auditors. As it is not compulsory, however, it is
doubtful that many close corporations will choose to comply voluntarily.
•The business-rescue procedure applicable to companies may be utilised by close
corporations in financial distress.
•The definition of ‘control’, and hence the terms ‘related’ and ‘interrelated’ persons
as used in the Companies Act (No. 71 of 2008), also applies to close corporations.
•A member of a close corporation can be declared a delinquent or placed under
probation in the same way as a director of a company in terms of the Companies Act
(No. 71 of 2008).
•Provisions relating to the dissolution and winding up of companies are the same for
close corporations.
•The complaints, investigations and adjudication procedures before the Takeover
Regulation Panel or Companies Tribunal are on par for companies and close
corporations.
Existing close corporations will continue to exist indefinitely, but must comply with
both the legal requirements of the Companies Act (No. 71 of 2008) as well as the
remaining provisions of the Close Corporations Act (No. 69 of 1984). Close corporations
are, therefore, subjected to more onerous administrative duties and arrangements than
before the enactment of the Companies Act (No. 71 of 2008). The benefit of simple
regulation in close corporations is consequently negated by the requirement to adhere
to both the Close Corporations Act (No. 69 of 1984) and the Companies Act (No. 71 of
2008).
Members of a close corporation may decide to convert the business into a company
should they wish to do so. This can be done by lodging a notice of conversion, a certified
copy of a special resolution by the members approving the conversion and a new
Memorandum of Incorporation (the founding document for a company) with the
Companies and Intellectual Property Commission. A filing fee must be paid, and a notice
of the conversion published. The Commission must effect necessary changes resulting
from the conversion and any resultant name changes. The effect of conversion from a
close corporation to a company is as follows:
•Each member of the close corporation will have an option to become a shareholder
of the company.
•The juristic person that existed as a close corporation will continue to exist in the
form of a company.
•All the assets, liabilities, rights and obligations of the close corporation will vest in
the company.
If any legal proceedings were instituted before the registration as a company by or
against the close corporation, they may be continued by or against the company. A close
corporation will also not be absolved from personal liability incurred in terms of the
Close Corporations Act (No. 69 of 1984) by converting into a company. The Companies
Act (No. 71 of 2008) contains provisions similar to those contained in the Close
Corporations Act (No. 69 of 1984). For instance, the provisions prohibiting reckless and
fraudulent trading and the provision providing for disregarding of the separate legal
personality in companies and close corporations are very similar.
The conversion would naturally place both an administrative as well as a financial
strain on the members of the close corporation. The business, depending on the type of
company it is changed into and its public interest score, may be required to comply with
the enhanced accountability requirements as contained in the Companies Act (No. 71 of
2008).
A close corporation is a separate taxpayer. For purposes of the Income Tax Act (No.
68 of 2008), close corporations are treated as companies and the distributions they
make to their members are regarded as dividends. The taxable income of a close
corporation is, therefore, taxed at the fixed corporate tax rate of 28 per cent. A
withholding tax on dividends is payable at a rate of 15 per cent on the gross amount of
all distributions of income made to members. Therefore, the total income tax payable by
the corporation and by the members on the profits generated by the corporation will be
influenced by the extent to which income is retained in the close corporation or
distributed to members. This flexibility can be used to the advantage of members.
A member’s interest can be transferred to another individual who will then become
a member of the close corporation. New members can also acquire a member’s interest
directly from the corporation by making a contribution, followed by an adjustment to
the percentages of member’s interest held by other members. In such a case, the relative
percentages of the remaining members will be adjusted. Transfers or acquisitions of a
member’s interest must be in accordance with the association agreement or, if there is
no such an agreement, with the approval of all the members of the corporation. A
transfer of a member’s interest does not affect the existence of the corporation.
Therefore, a member’s interest is more easily transferable than that a partnership
interest. The advantages and disadvantages of a close corporation are shown in Table
3.3.
Table 3.3: Advantages and disadvantages of a close corporation
Advantages:
•It has the advantages attached to separate legal (juristic) personality.
•Members enjoy the benefit of limited liability.
•There is increased capital-acquisition potential.
•Management is relatively simple.
•It enjoys continuity (perpetual existence).
Disadvantages:
•Membership is limited to ten persons.
•Juristic persons may not be members.
•No new close corporations may be registered.
•Certain close corporations are subject to stricter accountability criteria under the Companies Act (No. 71 of 2008),
Amendment Act (No. 3 of 2011) and the Companies Regulations, 2011.
3.2.6The company
The company developed to meet business people’s need to obtain more capital than
they could through a sole proprietorship or partnership. Companies as business forms
also bridged many of the deficiencies and undesirable features of partnerships. People
eventually came to accept the notion that, from a legal point of view, there could be a
fictitious person with rights and duties who is able to participate in commercial life and
whose existence would not depend upon the life of a natural person or persons.
Businesspeople could obtain large sums of money through such a separate legal entity
so that they could undertake commercial ventures that individuals could not afford, to
the benefit of the entire community. Companies enjoy all the benefits attached to a
separate legal (juristic) personality, usually combined with limited liability of the
shareholders (in profit companies) or members (in non-profit companies), as well as
potentially unlimited capital-generating capacity.
The company is characterised by the separation of ownership and control. This
means that a formal distinction is made between the members or shareholders of the
company and its managers and directors.
The Companies Act (No. 71 of 2008) provides for the incorporation of two types of
companies:
•Profit companies; and
•Non-profit companies.
An incorporated association not for gain, previously known as a Section 21 company
under the Companies Act (No. 61 of 1973), is now referred to as a non-profit company
(NPC). These companies are usually incorporated for a humanitarian or public purpose
such as the promotion of a specific sport, cultural activity or charity. NPCs do not issue
any of their profits to their members, but use these profits to promote the specific
purpose for which the company was formed. NPCs must have at least three directors,
but need not necessarily have any members. Upon winding up and dissolution of a NPC,
any assets or profits that are available cannot be distributed to the members. They can
only expect reasonable remuneration for their services as director, and they may not
derive any other benefits. Therefore, the aim of a non-profit company is not to make a
profit for personal benefit.
The most common type of company is the for-profit company. Profit companies are
divided into four different classifications: public companies, private companies, stateowned companies and personal liability companies.
A private company and a personal liability company must have at least one director,
and a public company or a non-profit company must have a minimum of three directors.
In addition to the minimum number of directors that the company must have, it must
satisfy the requirement to appoint an audit committee or a social and ethics committee,
if applicable.
The Memorandum of Incorporation of a private company must contain some
restriction on the transferability of its securities. The securities in a public company are
freely transferable.
The general public cannot subscribe to the shares of a private company. A private
company can, therefore, not list its shares on the stock exchange. Public companies may
raise capital by issuing shares to the public. The public can be invited to buy shares in
the company by means of a prospectus. A public company is also eligible to list its
shares on the stock exchange.
The name of a private company must end with the words ‘(Pty) Ltd’. The name of a
public company must end in the word ‘Ltd’. Certain professions allow their members to
form a certain type of company instead of practicing in a partnership. The members,
who usually have to be directors as well, are jointly and severally liable for the
contractual debts of the company. This is known as a personal liability company. The
name of a personal liability company must be followed by ‘Inc.’ or ‘Incorporated’.
Personal liability companies must meet the criteria applicable to private companies.
Only one person is required to form a personal liability company and there must be at
least one director. This type of company is mainly used by professional associations of
people such as attorneys or auditors. The Memorandum of Incorporation of a personal
liability company must express that creditors may hold directors jointly and severally
liable for the company’s contractual debts and liabilities. Members of the public
(outsiders to the company) are deemed to know of such a provision if the company’s
Notice of Incorporation includes a prominent statement drawing attention to the
inclusion of such a clause in the company’s Memorandum of Incorporation and where it
is situated. If this is done, third parties or outsiders who contract with this type of
company are deemed to be aware of the content of the company’s Memorandum of
Incorporation.
While all types of companies are subject to a number of legal regulations, a private
company is not as strictly controlled as a public company.
A state-owned company’s name must include the end expression ‘(SOC Ltd)’. This
type of company must be registered in terms of the Companies Act (No. 71 of 2008) and
must either be listed as a public entity in terms of the Public Finance Management Act
or owned by a municipality. Examples of state-owned companies are ACSA (SOC Ltd)
and South African Airways (SOC Ltd). These companies are obliged to appoint company
secretaries and audit committees. They are subject to the stricter accountability
provisions contained in Chapter 3 of the Companies Act (No. 71 of 2008) except if or to
the extent that the particular company is exempted from complying.
A company is a legal (juristic) person and therefore has its own rights, assets and
liabilities. A company exists independently from its members or shareholders and has
the potential for perpetual existence. Therefore, the personal estates of shareholders
remain unaffected when claims are instituted against a company. Like a close
corporation, a company has the same capacity and powers that a natural person enjoys,
except insofar as it is impossible for a juristic person to have such powers. Therefore,
the capacity of companies to conclude contracts that even fall outside the scope of the
company’s business is not limited. The main and/or ancillary objects of the company’s
business do not even have to be stated in the Memorandum of Incorporation.
However, it is possible for companies to restrict their capacity and powers in the
Memorandum of Incorporation. The Companies Act (No. 71 of 2008), however,
determines that such a limitation will not render a contract concluded contrary to any
such restrictions or limitations contained in the Memorandum of Incorporation invalid.
The shareholders and directors are generally not personally liable for the debts of
the company. An exception to this rule is contained in personal liability companies,
where the directors are personally liable for all contractual debts of the company.
Shareholders enjoy limited liability as they stand to lose only the consideration they
paid in exchange for their shares. In exceptional circumstances, the directors and
controlling shareholders may be held personally liable for debts of the company if the
juristic personality of the company has been abused or if the company’s business has
been conducted recklessly. The Companies Act (No. 71 of 2008) also contains a
provision to the effect that persons guilty of committing fraud or who abuse the
separate juristic personality of a company can be held accountable by the courts if it
would cause an unconscionable injustice to maintain the separation between the
company and the guilty persons inside it. As has been stated, a distinction is made
between ownership and control. A company has two organs:
•The shareholders in general meeting. The general meeting of shareholders or
members (as they are called in non-profit companies) makes broad policy decisions
and exercises control over the company’s affairs through its right to appoint and
remove directors and to amend the company’s Memorandum of Incorporation,
which govern the internal operation of the company. The voting rights of
shareholders are linked to the number of shares they hold in the company. Decisions
at meetings are normally taken by means of a vote.
•The board of directors. The administration of the company is entrusted to its
directors. The precise division of powers between the board of directors and the
general meeting is determined by the Memorandum of Incorporation. The day-to-
day management of the company is usually delegated to the board of directors. At
least 50 per cent of the directors must be appointed by the general meeting, and
their functions and powers may be defined in the Memorandum of Incorporation.
These functions are jointly exercised by the directors (as the board of directors) by
means of a majority vote. The board may delegate some of its functions and powers
to a managing director.
The structure of a company facilitates the appointment of specialised managers with
diverse areas of expertise and experience. This is usually an advantage, but there is
always a risk of decision-making being delayed owing to differences of opinion.
A company’s capital is made up of share capital, representing the consideration the
company receives in exchange for the shares it issues, as well as accumulated funds and
loan capital. As far as the potential for capital acquisition is concerned, the company –
the public company in particular – has a distinct advantage over sole proprietorships,
partnerships co-operatives and close corporations. This is because the general public
can be invited to invest capital and acquire shares in a public company. In public
companies, the transfer of ownership takes place through the unlimited and free
transfer of shares. Ownership is transferred through the private sale of shares or, in the
case of a listed company, through transactions on the stock exchange. The transfer of
shares usually has no influence on the activities of the company and the company
therefore has an unlimited lifespan.
Shares in a private company are not freely transferable. Transfer is usually subject
to the approval of the board of directors. A shareholder who wants to sell his or her
shares therefore has to find a buyer who is acceptable to the board. In most instances, a
shareholder has to offer the shares to the remaining shareholders first in proportion to
their existing shareholding. The shareholder may only transfer the shares to an outsider
if the other members are not prepared to acquire them at the same price. In other
words, a preemptive right exists in favour of other shareholders for transfer of shares in
a private company. Despite these limitations, the transfer of shares in a private
company is unlikely to influence its activities or the continued existence of the business.
In personal liability companies and state-owned companies the method of transfer of
shares may also be set out in the Memorandum of Incorporation.
The shares of public companies may further be listed on a stock exchange, which
increases the ability to raise capital even further. The strict regulation of companies,
coupled with compulsory financial disclosure, also makes financial institutions more
willing to provide loan capital to a company than to other forms of enterprise. The
capital-acquisition potential of a company can be further enhanced if shareholders or
directors are prepared to provide additional loan security in their personal capacities.
This often happens in practice, especially in the case of private companies.
A shareholder’s interest in the company is represented by the number of shares that
he or she holds in the company. Shareholders share in the profits of a company when a
dividend is declared, or a payment by virtue of shareholding is authorised. Distributions
by the company are subject to compliance with the criteria of solvency and liquidity.
A company is subject to many more legal prescriptions than the other forms of
enterprises, which translates into increased costs as well. However, as discussed above,
the legal prescriptions for close corporations have become equivalent to those
applicable to private companies.
Companies are mainly regulated by the Companies Act (No. 71 of 2008), the
Companies Amendment Act (No. 3 of 2011) and the Companies Regulations, 2011.
Other legislation also applies to companies – for instance, the Companies Act (No. 61 of
1973) still regulates winding up of insolvent companies, the Securities Services Act (No.
36 of 2004) regulates aspects of listed companies and the Auditing Profession Act (No.
26 of 2005) regulates certain aspects concerning disclosure and auditors. The
Companies Act (No. 71 of 2008) requires that a company register a Memorandum of
Incorporation (the sole founding document) with the Companies and Intellectual
Property Commission (the Commission), which replaced the Registrar of Companies
and Intellectual Property (CIPRO). This forms the document that sets out rights, duties
and responsibilities of shareholders, directors and others within and in relation to a
company and other matters. Provisions in the Memorandum of Incorporation may be
amended from time to time.
The Companies Act (No. 71 of 2008) provides for a simple procedure of registration.
A company is registered with the Commission by filing a Memorandum of
Incorporation and a Notice of Incorporation and paying the prescribed filing fee.
Although provision is made for name reservations, it is possible for profit companies to
be registered temporarily under their registration numbers until a suitable name is
registered. NPCs must reserve a name that adheres to the requirements as set out in the
Companies Act as well as the prescriptions contained in the Business Names Act (No. 27
of 1960) before registration is possible. The Memorandum of Incorporation governs the
internal as well as the external relationships of the company. This document contains
the name, objectives and internal management rules, among other things. It is also
possible for the board of directors to adopt company rules governing the management
of the company on matters not dealt with in the Companies Act or the Memorandum of
Incorporation. These rules may not conflict with the Companies Act (No. 71 of 2008) or
the Memorandum of Incorporation. The Memorandum of Incorporation and the rules
are binding between the company and each shareholder or member, the shareholders
or members among each other, between the company and each director or prescribed
officer and between the company and any other person serving the company as a
member of a committee of the board. Although the Memorandum of Incorporation and
company rules (if adopted) are available for public inspection, persons dealing with the
company are not generally presumed to be aware of the contents of these public
documents.
The Companies Act (No. 71 of 2008) has changed the face of South African
companies completely. Except for Chapter 14 dealing with the winding up of companies,
the whole of the Companies Act (No. 61 of 1973) has been repealed.
Public companies have to comply with stricter requirements concerning accounting
records, financial reporting, auditing, minutes of meetings, registers of shareholders and
annual returns than private companies and non-profit companies.
The Companies Act (No. 71 of 2008) has increased the powers and responsibilities
of directors. Previously, the powers of the board of directors of a company were
balanced with those of the general meeting of members of the company. However,
under the Companies Act (No. 71 of 2008) and its regulations, the effective governance
of corporations and liability for non-compliance has been placed squarely upon the
shoulders of the board of directors. The duties of directors are partially codified in the
legislation. However, these duties do not exclude any of the common-law duties already
applicable in respect of directors. These duties are in addition to the existing duties of
directors. In short, directors are required to disclose any personal financial interest that
they may have in the matters of the company; not to abuse the position of director of
information acquired by virtue of his or her directorship to acquire a personal benefit or
to benefit someone else or to cause harm to the company or a subsidiary of the
company; to disclose any material information that comes to his or her attention to the
board; and to act in good faith and for a proper purpose. Directors are obliged to act in
the company’s interest.
The rights of shareholders to hold directors and prescribed officers accountable
have been extended. Shareholders and other persons with an interest may, in terms of
the Companies Act (No. 71 of 2008), hold a director accountable for any financial losses
they may have suffered resulting from a failure properly to perform his or her duties
under the Act. In addition, a procedure for the removal of directors through an ordinary
resolution of the shareholders is provided for. The provision dealing with removal of
directors also provides for removal of a director by the rest of the board of directors
under certain circumstances. Shareholders also have alternative options of declaring a
director delinquent or placing him or her under probation.
In acknowledgement of the fact that the harsh penalties for non-adherence
connected to the onerous duties of directors may diminish the pool of qualified, suitable
and perhaps even willing directors, a version of the business judgment rule has been
adopted. In terms of this rule, a director is presumed to have acted with the required
degree of care and skill and in the company’s best interest in making a decision if it can
be proven that the decision under scrutiny had been made on an informed basis, devoid
of a personal interest or a conflict of interest and in the belief that it was in the
company’s best interest. This inclusion in the Companies Act (No. 71 of 2008) may
possibly counteract the negative impact the conceived stricter liability of directors
could have for the advancement of entrepreneurship and growth of profitable, efficient
South African companies.
A company is a taxpayer. It is currently taxed at a fixed percentage of 28 per cent on
its taxable income. Small companies with a limited income are taxed on a sliding scale
up to a specific limit. A withholding tax on dividends is payable by profit companies at a
rate of 15 per cent on the gross amount of the net dividends distributed. The advantages
and disadvantages of a company are summarised in Table 3.4 below.
Table 3.4: Advantages and disadvantages of a company
Advantages:
•Legal (juristic) and natural persons may be shareholders or members of companies.
•There are no restrictions on the number of shareholders who may invest in companies.
•Shareholders or members have limited liability (except in personal liability companies where directors are persona
contractual debts).
•The ability exists to raise large amounts of capital (especially in public companies where shares can be listed on th
exchange and are freely transferrable to the public).
•There is separation of ownership and control.
•There is continuity (perpetual existence).
•There is transferability of shares.
Disadvantages:
•There is a high degree of legal regulation.
•There are high operational costs.
3.2.7The business trust
The business trust is becoming an increasingly popular enterprise form. A business
trust is a trust that has the object of conducting a business in order to generate a profit.
Business trusts developed out of the ordinary trust. A trust is established through a
trust deed in terms of which the founder of the trust places assets under the control of a
trustee to be administered for the benefit of the beneficiaries. The trust deed may
consist either of a written contract or a valid testamentary writing. The trust assets and
the beneficiaries must be clearly identified in the trust deed. There is no limit to the
number of beneficiaries. Beneficiaries may be natural or juristic persons. A trust is a
separate entity from its trustees and beneficiaries, much like a company or a close
corporation. A trust is also not owned by anyone. It does not terminate unless by
agreement or if it is sequestrated as a result of its inability to pay its debts. Trusts are,
however, not creatures of statute. They are not registered with the Commission like
companies or co-operative societies. A trust is formed when a valid trust deed is
accepted by the Master of the High Court having jurisdiction.
A trust does not have legal (juristic) personality. However, in terms of some
legislation, trusts are considered to exist as legal persona. The Companies Act (No. 71 of
2008) also includes trusts under its definition of juristic persons. What exactly was
intended by this inclusion is unclear. It could possibly be that the legislature intends to
prevent avoidance of corporate law principles by trusts that are associated with groups
of companies.
The trustee owns the trust assets in an official representative capacity and is also
liable for the debts of the trust in his or her capacity as trustee. However, as the trustee
is liable only out of the trust assets and not in his or her personal capacity, the effect is
similar to limited liability. A trustee is considered to have two separate estates: a
personal estate out of which his or her personal debts are paid and the trust estate,
which is liable for trust debts only. A trust can be set up for any period of time.
Therefore, it is capable of perpetual existence.
The existence of a trust does not depend on the identity of the trustee or its
beneficiaries.
The management of a trust is in the hands of the trustees who have to exercise their
duties in accordance with the trust deed under the supervision of the Master of the High
Court. Trustees cannot perform any valid act in the name of, or on behalf of, a trust
before receiving valid authorisation from the Master of the High Court to do so. The
court may also intervene to remove or appoint new trustees, to declare a trust valid or
invalid and, in exceptional circumstances, to nominate specific beneficiaries where this
is not done in the trust deed. Trustees have a duty of good faith to the beneficiaries of
the trust. The trust founders are also able to exercise a measure of control over the
trustees by their right to amend the trust deed. In a private business trust, the same
persons are usually founders, trustees and beneficiaries of the trust. This means the
management structure is similar to that of a partnership.
The capital of a trust is provided by the trust founder or founders. A trust has limited
potential for capital acquisition. Loan capital may be obtainable, usually in exchange for
security provided by the parties to the trust. The distribution of profits to members will
generally be left to the discretion of the trustees, affording the parties maximum
flexibility with regard to retention or distribution of funds.
It is easy and cheap to establish a trust. All that is required is a trust deed identifying
the trust property, trustees and beneficiaries, and setting out the powers of the trustees.
There is very little regulation of trusts compared with regulation of other business
forms. Trusts that take investments from the public (for example, unit trusts) are,
however, subject to specific regulation. The lack of regulation of trusts can be a
disadvantage if the trust deed has not been formulated properly and if trustees are not
selected carefully.
A trust is regarded as a separate taxpayer. As a general rule, the trustee is seen as a
representative taxpayer. Income tax on trust income is allocated according to the
conduit principle. In other words, income that accrues to the beneficiaries is taxed in
their hands, while income retained in the trust is taxed in the hands of the trustee as
representative taxpayer. Where the entitlement of beneficiaries to income is not predetermined in the trust deed, but is left to the discretion of the trustees, great flexibility
in tax planning and structuring is possible. Transfer of the interest of a beneficiary can
be achieved by a variation of the trust deed. The advantages and disadvantages of a
private business trust are summarised in Table 3.5.
Table 3.5: Advantages and disadvantages of a private business trust
Advantages:
•Ease of formation.
•Natural and legal (juristic) persons may be parties to a trust, whether as founder, trustee or beneficiary thereof.
•Parties to a trust enjoy limited liability.
•Extreme flexibility.
•Absence of onerous legal regulation.
•Continuity (perpetual existence).
Disadvantages:
•Limited access to capital.
•Potential for conflict between parties.
3.2.8Co-operative societies
A co-operative is an autonomous association of persons, who unite voluntarily to meet
common economic, social and cultural needs by means of a jointly owned and
democratically controlled enterprise. A co-operative may, for instance, buy the
ingredients that the members need to produce a product in bulk (for instance, flour to
bake bread and cakes). The members then produce the product and the co-operative
market sells it on their behalf. In our example the bread and cakes are sold to the public
by the co-operative. A co-operative is a distinct form of enterprise that provides
services and/or products to its members. The profits made by the co-operative (known
as surpluses) are divided between its members in relation to the amount of the business
each member did with the co-operative.
Note that specific forms were developed for new co-operative registration that
would culminate in a more streamlined operation in terms of record keeping and
administration. These forms are accessible on the Internet at http://www.cipc.co.za/.
A co-operative may be a primary, secondary or tertiary co-operative. In a primary
co-operative a minimum of five natural persons need to register. Secondary cooperatives are formed by two or more primary co-operatives to provide sectoral
services to its members, and may include juristic persons. Tertiary co-operatives (or cooperative apexes) are co-operatives consisting of two or more secondary co-operatives
whose object is to advocate and engage organs of state, the private sector and
stakeholders on behalf of its members.
The name of a co-operative society must always indicate what the principal business
of the co-operative is. If a co- operative pursues many objectives, the name must be
followed by words such as ‘multipurpose’, or it could include ‘other projects’ after what
is considered to be a primary function. The words ‘co-operative’ or ‘co-op’ must be part
of the name and the word ‘limited’ or ‘Ltd’ must be the last word in its name unless the
co-operative’s constitution does not limit the liability of the members of the cooperative. A secondary co-operative must have the words ‘secondary co-operative’ as
part of its name. A tertiary co-operative (or ‘co-operative apex’) must have the words
‘tertiary co-operative’ as part of its name.
The highest decision-making structure of a co-operative is a general meeting of
members. Notably, one of the characteristics of co-operatives is democratic decisionmaking. Generally, each member enjoys one vote equal to that of the other members.
Anybody may become a member of a co-operative. The constitution may only
restrict the persons eligible for membership if the restriction reasonably relates to the
business of the co-operative set out in its constitution and to the commercial ability to
provide services to prospective members. A restriction may not amount to unfair
discrimination. Therefore, co-operative societies are open to all persons able to use
their services and willing to accept the responsibilities of membership, without gender,
social, racial, political, or religious discrimination.
A co-operative has to have capacity to do anything that is necessary to carry out its
objectives, subject to limitations imposed by its constitution, the Co-operatives Act (No.
14 of 2005) and any other law. The affairs of a co-operative must be managed by a
board of directors. The board of directors must exercise the powers and perform the
duties of the co-operative subject to the Act and the constitution of the co-operative.
The board of directors remains subordinate to the members in general meeting. If a cooperative performs any act outside its functions, the co-operative and a director of the
co-operative who authorised the performance of that act or who performed that act
knowing that the co-operative is not empowered to perform that act is guilty of an
offence.
Co-operatives are formed through registration at the special Department for Cooperative Societies, which is a subdivision of the Companies and Intellectual Property
Commission. It is not restricted to agriculture and farming activities. Trading cooperatives can be used for various kinds of businesses. Relatively few co-operatives
have been formed in comparison with other forms of business enterprises. By nature,
co-operative societies do not lend themselves to strong business ventures.
Sustainability issues due to a lack of resources and support are the main reasons.
Co-operative societies are similar to private companies in many respects. Like a
private company, a co-operative society is also recognised as a legal (juristic) person
once it is registered and a registration certificate is issued. Members of co-operatives
also enjoy limited liability for the debts of the co-operative. Termination of a member’s
membership does not affect the continued existence of the business. Consequently, a cooperative society provides continuity (perpetual existence) of the business. The liability
of a member of a co-operative is limited to an amount equal to the nominal value of the
shares, for which the member has not paid, that the member holds in the co-operative.
A co-operative society is also similar to a partnership in the sense that the members
work together for a common purpose: to meet the members’ mutual or common
economic, social and cultural needs.
A co-operative is incorporated as a juristic person from date of registration as
reflected on its registration certificate that is issued to it by the Department. Cooperatives are jointly owned by the members.
The Department may make financial support available to co-operatives that comply
with certain requirements. Co-operatives that adhere to the co-operative principles, and
that consist mainly of black persons, women, youth, disabled persons or persons in
rural areas, and that promote equity and participation by its members, qualify for these
additional fiscal benefits.
The Co-operatives Act (No. 14 of 2005) regulates this business form. However, cooperatives are not regulated through legislation only. The constitution of a co-operative
plays a very important role in the functioning of the business. It regulates the
relationship between members of the co-operative and the directors. Among other
things, it regulates what the principal business of the co-operative is, any restrictions in
the capacity of the business, voting and decisionmaking, how meetings are to be
conducted, and the powers that the board of directors has to manage the business, the
requirements for membership, how funds are to be utilised and paid to members, etc.
Co-operatives strive to achieve certain economic advantages for their members
through joint action on the behalf of members. The business is managed democratically
by the members and specific values must be maintained for it to subsist. The cooperative principles are guidelines by which cooperatives put their values into practice.
Co-operatives are based on the values of self-help, self-responsibility, democracy,
equality, equity and solidarity. In the tradition of their founders, co-operative members
believe in the ethical values of honesty, openness, social responsibility and caring for
others. Failure to comply with the co-operative principles could potentially lead to an
investigation or inspection of the business of a co-operative or prosecution. The
Registrar may also make any recommendation that is considered as being appropriate,
including winding up and termination of the co-operative.
In South Africa, co-operatives are found mainly in farming communities as
organisations selling and/or supplying products or products and services. Because of
their distinctive features, co-operatives are not usually real alternatives to the forms of
business that we have mentioned. Nevertheless, co-operative societies may assist in the
creation of better socio-economic circumstances, particularly where agreements are
concluded between manufacturers, small businesses and supermarkets. This practice
could potentially promote cost saving and more effective marketing of produce. In
addition, by combining to produce in a single pool, small producers who produce in the
same enterprise can more effectively provide the market. The advantages and
disadvantages of a co-operative are presented in Table 3.6 below:
Table 3.6: Advantages and disadvantages of a co-operative
Advantages:
•Co-operatives are recognised as juristic persons.
•Members of co-operative societies have the benefit of limited liability.
•Any person (whether a natural or juristic person) may become a member of a co-operative society.
•There is no restriction on the maximum number of members in a co-operative society.
•The participatory nature contributes to the achievement of outcomes that one person would not be capable of achi
•Necessary services may be more accessible, and marketing, distribution and selling of produce are simplified and
result.
•The business form is reasonably flexible in relation to other forms of business enterprises that provide the benefit o
personality.
•The legislation is less stringent in its requirements than that applicable to companies.
•Enabling legislation facilitates the provision of support for businesses that are owned by women, black people, you
persons, or persons in rural areas.
Disadvantages:
•Co-operatives often lack the managerial requisites of operating a business as a result of a lack of skill.
•The participatory decision-making structures mean that all members need some understanding of financial manag
Unfortunately, all members are often not properly equipped.
•Co-operatives require mentorship and support to become viable and to remain sustainable.
•Unless the levels of trust between members are high, tension can develop around the use, and allocation, of mone
participatory decision-making.
•Business efficiency can be influenced negatively in worker co-operatives where conflicts could exist between the r
of workers in their capacity as owners (to whom managers are accountable) and in their capacity as producers (wh
accountable, in the context of production, to managers).
•The short-term goals of members to improve their quality of life may contrast with the longer-term interests of the c
economic entity.
Critical thinking
Why is the co-operative society concept not used more frequently in the South African
business context?
3.2.9Summary of legal forms of ownership
Once entrepreneurs have identified their opportunity and evaluated it, they have three
options for entering the business world (as discussed in Chapter 2):
•Entering into a franchise agreement;
•Buying an existing business; or
•Establishing a business from scratch.
In all of these cases, the entrepreneur’s choice of a form of business is very important. In
choosing a form of enterprise, entrepreneurs must remember that their choice must
reflect their particular situation. There may be a business form that is best for the
entrepreneur’s individual circumstances. Understanding the forms of business, and the
characteristics, advantages and disadvantages of each one, is the entrepreneur’s key to
selecting the form of ownership that best suits him or her.
In this section, we have discussed the different forms of enterprise available to the
entrepreneur. We have compared the characteristics, advantages and disadvantages of
the sole proprietorship, the partnership, the close corporation, the company, the
business trust and co-operative societies.
Once the entrepreneur knows what the available options are, he/she can put
everything together by drawing up the business plan for the new business.
3.3Developing a business plan for the new
business
In this section, the development of the business plan for the new business venture will
be examined.
3.3.1The objectives of a business plan
For the entrepreneur starting a new business, a business plan is a written document
that accomplishes three main objectives. The most important objective is to identify and
describe the nature of the business opportunity or the new venture.
The second objective is to present a written plan of how the entrepreneur plans to
exploit the opportunity. Here, the business plan explains the key variables for the
success or failure of the new venture. It is a guideline for the things that must be done to
establish and operate the new venture. It provides a large number of elements (such as
the mission, goals, objectives, target markets, operating budgets, financial needs and so
on) that the entrepreneur and managers can draw on to lead the business venture
successfully. These elements, which help managers to keep the business venture on
track, constitute the key components of the business plan. A business plan is therefore
also a valuable managerial tool that helps the entrepreneur and his or her team to focus
on charting a course for the new business.
A third objective of the business plan is to attract investors, or to persuade a bank,
other institution or person who provides financial resources to lend the entrepreneur
the money he or she needs to establish the new business. Careful preparation can make
the difference between success and failure when trying to find capital in the financial
markets.
Apart from the above-mentioned main objectives, a business plan provides many
other benefits, such as:
•systematic, realistic evaluation of the new businesses’ chances of success in the
market;
•a way of identifying the key variables that will determine the success of the new
venture, as well as the primary risks that may lead to failure;
•a game plan for managing the business successfully;
•a management instrument for comparing actual results against targeted
performance; and
•a primary tool for attracting money in the hunt for financial resources.
3.3.2Importance and necessity of the business plan
The overall importance of the business plan lies in its planning activities. Planning is the
fundamental element of management that pre-determines what the business proposes
to accomplish and how this is to be accomplished. Therefore, planning, and the idea of a
business plan, is hardly something new. Big businesses have long been turning out
annual business plans by the thousand, especially for marketing new products, buying
new businesses or expanding globally. What is new, however, is the growing use of such
plans by small entrepreneurs. These entrepreneurs are, in many cases, forced by
financial institutions to draw up a business plan before any financial support will be
considered.
The business plan is important not only to the entrepreneur, but also to his or her
employees, potential investors, bankers, suppliers, customers and so on. Each group of
stakeholders in the business will study the business plan from a different perspective. It
is therefore clear that any business, but especially a new venture, needs to have a
business plan to answer questions that various stakeholders in the venture may raise.
There are eight reasons for an entrepreneur to write a business plan:
1.To sell the business to him- or herself. The most important stakeholders in any
business are its founders. First and foremost, the entrepreneur needs to convince
him or herself that starting the business is right for him- or her, from both a
personal and an investment viewpoint.
2.To obtain bank financing. Up until the late 1980s, writing a business plan to
obtain bank financing was an option left up to the entrepreneur. Bankers usually
took the approach that a business plan helped the entrepreneur to make a better
case, though it was not an essential component in the bank’s decision-making
process. However, banks and government-supported organisations that assist
entrepreneurs to obtain finance now require entrepreneurs to include a written
business plan with any request for loan funds. As a consequence, obtaining money
from a bank or assisting organisation is tougher than it has ever been, and a
business plan is an essential component of any effort to convince banks about
financing a new business. Today, even an excellent business plan is not a
guaranteed way of obtaining capital from the banks.
3.To obtain investment funds. For many years, the business plan has been the
key to unlock venture capital or informal capital from private investors. Remember
that bank financing is not the only option for obtaining funding for a new business
and that private venture capital has been the source of financing of some of the
biggest corporations in the world.
4.To arrange strategic alliances. Joint research, marketing and other
collaborative efforts between small and large companies have become increasingly
common in recent years, and these require a business plan to convince the large
company to get involved.
5.To obtain large contracts. When small businesses seek substantial orders or
ongoing service contracts from major corporations and government institutions,
the corporations often respond (perhaps somewhat arrogantly) as follows:
‘Everyone knows who we are, but no one knows who you are. How do we know
you’ll be around in three or five years to provide the parts or service we might
require for our product?’ For this reason, entrepreneurs are required to have a
business plan.
6.To attract key employees. One of the biggest obstacles that small, growing
businesses face in attracting key employees is convincing the best people to take
the necessary risk and to believe that the businesses will thrive and grow during
the coming years.
7.To complete mergers and acquisitions. No matter which side of the merger
process the entrepreneur is on, a business plan can be very helpful if the
entrepreneur wants to sell the business to a large corporation.
8.To motivate and focus the management team. As smaller businesses grow and
become more complex, a business plan becomes an important component of
keeping everyone focused on the same goals.
3.3.3Stakeholders in a business plan
There are internal as well as external stakeholders (see Figure 3.1).
Figure 3.1: Stakeholders in a business plan
Each category is discussed in the sections that follow.
3.3.3.1Internal stakeholders
THE MANAGEMENT TEAM
A written business plan is essential for the systematic coverage of all the important
features of a new business. It becomes a manual for the entrepreneur and his or her
management team for establishing and operating the venture. The following aspects are
of primary importance to the entrepreneur and his or her team:
•The vision that the entrepreneur has for the new business;
•The mission that defines the business;
•An overview of the key objectives (this is derived from the mission statement); and
•A clear understanding of the overall strategy for accomplishing the objectives, as
well as a clear understanding of the functional strategies (marketing strategy,
financial strategy, human resources strategy and so on) that form substantial parts
of the business plan.
EMPLOYEES
From the employees’ point of view, there is also a need for a business plan. More
specifically, employees need to have a clear understanding of the venture’s mission and
objectives to be able to work towards attaining the objectives. A business plan also
serves to improve communication between employees and to establish a corporate
culture. A well-prepared plan provides employees with a focus for activities. The
business plan also helps prospective employees to understand the emerging culture of a
young business. It is important that managers and employees contribute to the
development of the business plan to establish ownership of the plan among them.
3.3.3.2External stakeholders
The business plan is even more important to outsiders, on whom the entrepreneur
depends for the survival and success of the venture. Indeed, the importance of the
business plan may be said to revolve around ‘selling’ the new business to outsiders, who
may include the customers, investors and banks.
CUSTOMERS
When small businesses seek substantial orders or ongoing service contracts, major
customers always want assurance that the business will still be around in three- or fiveyears’ time to provide the parts or service they might require for the product.
Customers are almost always impressed by a business plan, as it proves to them that the
entrepreneur has thought about the future.
INVESTORS
Almost everyone starting a business faces the task of raising financial resources to
supplement their own resources (personal savings, investment in shares or property
and so on). Unless the entrepreneur has a wealthy relative who will supply funds, he or
she will have to appeal to investors or bankers to obtain the necessary funds. Very few
investors or financial institutions will consider financial assistance without a wellprepared business plan.
Investors have a different interest in the business plan from the interest of other
stakeholders, and if the entrepreneur intends to use the business plan to raise capital,
he or she must understand the investor’s basic perspective. A prospective investor has a
single goal: to earn a return on the investment, while at the same time minimising risk.
While many factors may stimulate an investor’s interest in the venture, certain basic
elements of a business plan attract (or repel) prospective investor interest more than
others.
The matrix in Figure 3.2 presents an evaluation of business plans from the investor’s
point of view. Only certain basic indicators have been included.
BANKS
Banks are a common source of debt capital for small businesses.2 To improve the chance
of obtaining bank loans or what is known in South Africa as overdraft facilities, the
entrepreneur should know what banks look for in evaluating an application for such a
loan. Most banks use the four Cs to evaluate a loan application: capital, collateral,
character and conditions.
•Capital. A small business must have a stable equity base of its own before a bank
will grant a loan. The bank expects the small business to have a capital (equity) base
of investment by the owner/s before it will make a loan. South African banks
generally insist on at least 50 per cent equity.
•Collateral. This includes any assets the owner pledges to a bank as security for
repayment of the loan. Bankers view the owner’s willingness to pledge collateral
(personal or business assets) as an indication of the entrepreneur’s dedication to
making the venture a success.
•Character. Aspects of the owner’s character (such as honesty, competence,
determination, ability and a good track record) play a critical role in the bank’s
decision to grant a loan.
•Conditions. The conditions surrounding a loan request also affect the bank’s
decision. Banks will consider factors relating to the business operation, such as
potential market growth, competition and form of ownership, as well as the current
state of the economy. The poor world economy since 2008 has changed conditions
drastically and has resulted in banks being very reluctant to provide working capital
to small businesses.
Figure 3.2: Matrix for the evaluation of business plans
CASE STUDY: The role of banks in funding small business in South Africa3
Banks in general have a vital role to play in the optimal functioning of the economy and
especially in the process of directing the flow of capital between households and businesses.
This is called a virtual spiral where banks use money that is deposited by households (and
on which it pays a small amount of interest) to lend out to businesses on the medium to
longer term at a much higher interest rate. The difference in margin that is created is then
part of the profits generated by the bank, which is then shared in the form of salaries,
bonuses and dividend payments to shareholders. Obviously, there are some risks involved
for the banks in that some businesses end up not being able to repay the amount borrowed
or the interest that is being charged. Banks, however, usually demand surety (collateral for
example in the form of fixed assets) to cover these risks that they take. There is however
rising concern that banks are not really fulfilling this function to provide business loans,
especially to start-up small businesses in South Africa. Looking in general terms to banking
activity in South Africa it would seem that banks are more interested in funding existing
businesses with a track record. Figures indicate that banks are providing loans to existing
larger businesses in various formats, one of which is providing overdraft facilities on their
current account, while another is in the form of mortgages to assist existing businesses to
acquire buildings, etc. However, it seems that banks are loath to perform the basic function
of lending money to new business start-ups, especially those without collateral.
This problem with the funding of small businesses is not unique to South Africa but is
prevalent in Africa as a whole. The problem is especially pertinent to small businesses with
fewer than nine employees and small and medium enterprises with female owners as well as
entrepreneurs operating in the informal sector, such as in spaza shops. The major problems
that these businesses have in obtaining finance from banks are their limited availability of
collateral and lack of information about their financial situation and solvency issues (this
information is contained in a professional business plan).
The question arises … where do small businesses then obtain start-up funding? Most
small businesses rely on their retained earnings (profits made if the concern is ongoing) or
funding from friends and family for start-up capital. Figures indicate that about 80 per cent of
SMEs in Africa provide funding themselves (or from family and friends), around 3 per cent
through supplier credit and only 8 per cent through banks. Very small enterprises are mostly
funded by government institutions such as SEDA (Small Enterprise Development Agency).
South African banks focus more on medium and large businesses and large corporations.4
Financing microenterprises is largely left to state-run bodies and development finance
initiatives, while the big five banks have begun to focus more on serving small and medium
businesses.
Research done in 2017 indicates that 68 per cent of SMEs view economic instability as a
primary challenge, while 38 per cent expressed concern about their cash flow. The South
African small business community is concerned about the lack of support from government
with 89 per cent of the SMEs interviewed feeling that the Department of Small Business
Development does not provide the right support. This lack of support is felt in all aspects
promised by government, with 48 per cent of entrepreneurs requiring additional funding, 44
per cent want less red tape, 43 per cent want more tax benefits, and 36 per cent want
improved access to finance.5
3.3.4The scope of the business plan: How much planning is
needed?
The level of commitment to the writing of a business plan varies greatly among
entrepreneurs. Should it be one page long or one hundred pages long? Considerations
that determine the amount of planning include the following:
•the style and ability of the entrepreneur;
•the preferences of the management team;
•the complexity of the product or service and of the business;
•the competitive environment of the business; and
•the level of uncertainty in the business environment.
The depth and detail in the business plan therefore depend on the size and scope of the
proposed new venture. An entrepreneur planning to market a new chicken fast-food
franchise nationally will need a comprehensive business plan, largely because of the
nature of the product and the market pursued. In contrast, an entrepreneur who wants
to manufacture burglar bars and steel gates for the local market in a suburb or city will
not need such a comprehensive plan. The difference in the scope of the business plan
may depend on whether the new venture is a service, involves manufacturing, or is an
industrial (business) product or consumer product. The size of the market, competition
and many other environmental factors may also affect the scope of the business plan.
3.3.5Components of the business plan
While it is important that the primary components of a solid business plan be outlined,
every small entrepreneur must recognise that such a plan should be tailor-made,
emphasising the particular strengths of the new venture. Two issues are of primary
concern when preparing the business plan:
•The basic format of the written presentation; and
•The content or components of the business plan.
3.3.5.1The format of the business plan
The first question that comes to mind when thinking about writing the business plan is:
Who should write the plan? Many small-business managers employ the professional
assistance of accountants, attorneys and business consultants. However, experts agree
that the entrepreneur may consult professionals, but should, in the end, write the plan
him- or herself. To help determine whether to use a consultant, the entrepreneur may
use a table similar to Table 3.7 to make an objective assessment of his or her own skills.
Table 3.7: Skills assessment for writing a business plan
Through such an assessment, the entrepreneur can identify which skills are needed
and who should be consulted to help prepare the business plan.
There are no rigid rules regarding the format of the business plan. However,
whichever format is eventually decided on, the plan should have an attractive
appearance.
The length of the business plan will depend on the venture, but it can vary from five
to 20 pages, excluding annexures and substantiating documents.
3.3.5.2The content of the business plan
As has already been mentioned, the business plan for each venture is unique. Although
no single standard list of business-plan components exists, there is considerable
agreement as to what the content of the business plan should be. The following are the
most important components of the business plan:
•the executive summary;
•the general description of the venture;
•the products and services plan;
•the marketing plan;
•the management plan;
•the operating plan;
•the financial plan; and
•the supporting materials.
By now, it may be assumed that the value of a business plan is understood and the
entrepreneur is ready to prepare one.
Apart from the fact that the business plan begins with the cover page, the huge
amount of information that is available on the business makes it difficult to decide what
to include under the headings of the various business plan components listed above.
The beginner needs a conceptual scheme to identify the important segments of a good
business plan. Table 3.8 provides an overview of such a plan.
Table 3.8: Overview of a business plan
Executive summary
A one- to three-page overview of the total business plan. Written after the other sections are
highlights their significant points and, ideally, creates enough excitement to motivate the rea
General company
description
Explains the type of company and gives its history if it already exists. Says whether it is a m
retail, service or other type of business. Shows the type of legal organisation.
Products and
services plan
Describes the product and/or service and points out any unique features. Explains why peop
product or service.
Marketing plan
Shows who the business’s customers will be and what type of competition the business will
marketing strategy and specifies what will give the business a competitive edge.
Management plan
Identifies the ‘key players’: the active investors, management team and directors. Cites the
competence they possess.
Operating plan
Explains the type of manufacturing or operating system the business will use. Describes the
raw materials and processing requirements.
Financial plan
Specifies financial needs and contemplated sources of financing. Presents projections of re
and profits.
Table 3.9 provides a more detailed outline for each section of a good business plan.
Once the entrepreneur has completed each of these phases, he or she will have a simple
but complete draft of a business plan. In developing a comprehensive plan, the simple
plan will be supplemented by an exhaustive set of questions that should be considered.
The examination and consideration of each component of the comprehensive business
plan will be discussed in more detail in the sections that follow.
Table 3.9: Outline of a simple business plan
General company description
•Name and location
•Nature and primary product or service of the business
•Current status (start-up, buy-out or expansion) and history (if applicable
•Legal form of organisation
Products and services plan
•Description of products and/or services
•Superior features or advantages relative to competing products or servi
•Any available legal protection, for example, patents, copyrights or trade
•Dangers of technical or style obsolescence
Marketing plan
•Analysis of target market and profile of target customer
•How customers will be identified and attracted
•Selling approach, type of sales force and distribution channels
•Types of sales promotion and advertising
•Credit and pricing policies
Management plan
•Management team members and their qualifications
•Other investors and/or directors and their qualifications
•Outside resource people and their qualifications
•Plans for recruiting and training employees
Operating plan
•Operating or manufacturing methods used to produce the product or se
•Description of operating facilities (location, space and equipment)
•Quality-control methods to be used
•Procedures used to control inventory and operations
•Sources of supply and purchasing procedures
Financial plan
•Revenue projections for three years
•Expense projections for three years
•Necessary financial resources
•Sources of financing
3.3.6Description of a new venture
The next step in the preparation of the business plan is a description of the venture.
This step is an extension of the feasibility analysis discussed in Chapter 2. The
entrepreneur analyses the business environment to assess the new idea or venture, the
factors that might improve his or her chances of success and factors that could work
negatively against the proposed venture. This analysis of the environment assists the
entrepreneur in making a rational decision about whether to implement the idea or
abandon it. If the entrepreneur decides to implement the idea, he or she must describe it
in detail and prepare a business plan for the new idea or venture.
3.3.6.1A general description of the new venture
Bearing in mind the needs and requirements of banks and investors for a successful
business plan (that it should not be too long, and that it should be concise and accurate),
a brief but accurate description of the new venture is necessary.
The body of the business plan begins with a brief description of the new venture
itself. If the business is already in existence, its history is included. This section informs
the reader, for example, whether the business is engaged in tourism, retailing,
construction or some other line of business, and also where the business is located and
whether it serves a local or an international market. In many cases, issues noted in the
legal plan, especially the form of organisation, are incorporated into this section of the
plan. Some important questions to be addressed in this section of the plan may include
the following:
•Is this a start-up, buy-out or expansion?
•Has this business begun operations?
•What is the business’s mission statement?
•Where was this business started?
•What is the basic nature and activity of the business?
•What is its primary product or service?
•Which customers are served?
•Is this business in manufacturing, retailing, service or another type of industry?
•What are the current and projected states of this industry?
•What is the business’s stage of development? For example, has it begun operations?
Is it producing a full product line?
•What are its objectives?
•What is the history of this company?
•Which achievements have been made to date?
•Which changes have been made in the structure or ownership of the existing
business?
•What is the firm’s distinctive competence?
Again, there are no fixed issues that should be considered in the general description of
the new venture or existing business. Some entrepreneurs may emphasise a successful
history, while others may concentrate on the new business’s competitive advantage.
The following general description of a business called Destiny Travel highlights four
critical aspects that should be included in the general description.
CASE STUDY: Description of Destiny Travel
Name and location of the new venture
Destiny Travel is a proposed extension of a successful existing small venture called
Tshwane Airport Shuttle. Tshwane Airport Shuttle has been operating for ten years,
transferring mainly tourists from O.R. Tambo International Airport to Pretoria and back. It
now wants to expand into guided tours for tourists. Destiny Travel will be a partnership
between James Madison and Jonathan Jansen. They can both be contacted at 444 Nicolson
Street, Brooklyn, Pretoria, 0181, which is also the existing premises of Tshwane Airport
Shuttle. Tel. 012 444 4444.
Nature and primary product or service of the business
During the past few years, the two partners have studied trends in the transfer and
transportation of tourists, mainly in the Gauteng area of South Africa. They have identified a
need of tourists for safe transfers, safe day trips and longer tours in a crime-ridden South
Africa, where tourists have come to be included in robbery and murder statistics. Because of
their previous experience in transferring tourists and business people from O.R. Tambo
International Airport to Pretoria, offering guided transfers, trips and tours will form a natural
extension of their existing small business. They expect to satisfy their customers by
providing a safe and quality guided tour service in the upmarket segments of the tourism
industry in Gauteng.
Current status
The new business, Destiny Travel, will start operating at the beginning of the new year,
assuming that adequate funding can be found in the next four months.
Legal form of organisation
The new business will begin operation as a partnership between James Madison and
Jonathan Jansen. Both partners agree to enter into a formal partnership agreement based
on a 50/50 decision concerning workload, profits and responsibilities, and how the new
venture is funded. Should the source of funding necessitate a limited company, the two
persons also agree to restructure the legal form of the new venture to accommodate any
requirements a bank or private investor may have.
Critical thinking
A business plan takes a lot of time and effort and is mostly done in conjunction with an
outside expert providing assistance. Do you think that a business plan could really assist you
to obtain a loan from a financial institution?
3.3.7Analysing the market
Certain activities that form the basis of the business plan take place simultaneously.
Strictly speaking, the description of the new venture’s strategy can only be finalised
once the entrepreneur has completed a market analysis to find out if a market for the
product exists and, if so, how he or she will exploit the market. In other words, once the
entrepreneur is convinced that there is good market potential in a particular segment of
the market, he or she must work out how the product will reach the market and which
marketing strategy to adopt.
Entrepreneurs often become infatuated with their product or service, and believe or
hope that there is a market for it. This euphoria can be very costly, if not devastating, to
the new venture with its limited resources. The analysis of the new venture’s market
and the development of a marketing strategy involves the following key items:
•Concepts;
•The identification of the target market/s;
•Research and forecasting in the target market; and
•A marketing plan or strategy for the selected market segment/s.
Chapter 13 deals with these aspects in detail.
3.3.8Determining the financial needs of the new venture
The entrepreneur or potential investors need answers to certain crucial financial
questions to determine whether the new venture is not only attractive, but also feasible.
The financial analysis constitutes a further crucial component of the business plan. The
entrepreneur’s projections of a new venture’s profits, its required assets and its
financial requirements over the next one to five years should be supported by
substantiated assumptions and explanations about how the costs, profits and financial
requirements are determined. In order to make the necessary financial projections, the
entrepreneur must first have a good understanding of financial statements and how to
interpret them.
The key issues in this section are therefore:
•an understanding of how financial statements work;
•an understanding of how profitability is assessed; and
•an ability to determine a venture’s financial requirements.
Chapter 14 deals with these aspects in detail.
3.4The location of the business
3.4.1The choice of location
The choice of geographical location for premises is of extreme importance for all kinds
of businesses, although it may be more important for some businesses than for others.
For certain businesses, location may be a crucial factor, for instance fast-food
businesses. Depending on the nature of the proposed product or service to be offered,
the entrepreneur should decide, for example, whether the business needs to be located
near its market, near its sources of raw materials, near to other competitors, in the city
centre, in the suburbs, in a rural area, in existing industrial areas or according to other
personal preferences.
The location factors that have to be considered when making this choice are briefly
analysed in section 3.4.2.
3.4.2Location factors
The most important location factors are the following:
•Sources of raw materials. Where, in which quantity, of which quality and at which
prices can these materials be obtained? This is especially important for a company
such as Eskom that needs to be near to its coal mines as a major source of raw
materials.
•Availability of labour. Where and at which cost is the required labour available in
terms of, for example, quantities, levels of training, development potential and
productivity? This is important to South African automobile manufacturers, for
example, which are labour intensive but require skilled workers to operate
specialised assembly machines.
•Proximity and access to the market. This includes aspects such as the potential
advantages over present competitors, the current extent and potential development
of the market, the perishability of products, the needs of consumers and users
regarding, for example, delivery, after-sales services and personal contact, and the
possible entry of competitors into the market.
•Availability and cost of transport facilities. This includes aspects such as the
availability of rail, air and road transport; pipeline and water transport facilities; the
transport costs of raw materials in relation to finished products; and the possibility
of the entrepreneur using his or her own transport (road links and limitations of
private transport). The accessibility to Transnet facilities (rail haulage) could be a
major factor for farmers delivering maize, for example.
•Availability and costs of power and water. These must satisfy the needs of the
prospective business. We all understand the problems that South African businesses
encounter during load shedding.
•Availability and costs of a site and buildings. Buildings need to comprise units of
the required size and appearance, with the necessary facilities and expansion
possibilities. Consideration should also be given to accessibility for suppliers of raw
materials, customers and employees.
•Availability of capital. This does not necessarily affect the choice of a specific
location, but can still play a role when the suppliers of capital set specific conditions
or express certain preferences in this regard, for example, or when capital is such a
limiting factor that it necessitates the choice of the cheapest location.
•Attitude, regulations and tariffs of local authorities. These comprise, for
example, the attitude of local authorities to industrial development, including
possible concessions that encourage location, health regulations, building
regulations, property rates, water and electricity tariffs, and the availability and
costs of other municipal services.
•The existing business environment. This could influence the establishment of the
proposed business by, for example, the provision of repair and maintenance
services, as well as the availability of spares, and banking, postal and other
communication facilities.
•The social environment. This concerns the provision of satisfactory housing and
educational, medical, recreational and shopping facilities for employees of the
proposed business.
•Climate. Some production processes require a particular type of climate. Climate
can also influence the acquisition, retention and productivity of personnel.
•Central government policy. This may encourage or discourage the establishment
of certain types of business in specific areas in a direct or indirect manner through,
for example, tax concessions.
•Personal preferences. These relate to the area or areas in which entrepreneurs
and their families prefer to live.
Critical thinking
In business there is an old saying that the key to the success of a business lies in three
words, namely ‘location, location and location.’ Do you always have to agree with this
statement?
3.5Summary
In this chapter, the legal forms of a business that are available to the entrepreneur were
discussed. This discussion covered the characteristics, advantages and disadvantages of
the sole proprietorship, the partnership, the close corporation, the company,
the business trust and co-operative societies. In addition, the development of the
business plan for a new venture was examined. The final section of the chapter dealt
with the most important location factors that the business must consider.
Small business perspective
The SME realities in South Africa (circa 2018)
Globally, small businesses are seen as the main generator of jobs, and a major contributor
to the GDP of the economies of countries. The South African government has a National
Development Plan (NDP), of which one of the objectives is that small businesses should
create 90 per cent of jobs in the economy by 2030. This objective has been questioned in
recent research with regard to the current size of the small business sector. This research by
the Small Business Institute (SBI), in partnership with the Small Business Project (SBP),
debunks previous research that estimated the number of SMMEs in South Africa at 5,6
million. The previous research stated that the greatest majority (3,3 million) of small
businesses were ‘survivalist businesses’ with another 1,7 million micro-enterprises and only
554 000 small enterprises. The new research estimates that South Africa has only 250 000
formal small-, medium- and micro-sized enterprises (SMMEs), which is much less than the
previous survey estimation.
One of the implications of the new research is that the estimated size of South Africa’s
small business segment is not in line with common guidelines regarding SME contribution to
the GDP, employment absorption and contribution to the tax base of the country. As a
baseline, it is reported that in OECD countries more than 95 per cent of businesses are
defined as SMEs, creating between 60–70 per cent of employment opportunities and
contributing up to 60 per cent to the GDP of these countries. In comparison, recent research
now indicates that the South African SMEs makes up 98,5 per cent of all businesses but
employ only 28 per cent of employees in the country
What is of further interest is that the largest 1000 businesses are the greatest employers
of people in South Africa, generating as many as 56 per cent of jobs in South Africa with
central government one of the largest employers in the country. A problem identified in the
recent research, is that government and its agencies, which are tasked to support and grow
SMEs, do not use a universal definition of what a small, very small or medium business
entails in the application of the laws, regulations and key strategies to grow SMEs in South
Africa. The confusion of what a SME entails is reflected across 70 existing laws, regulations
and strategies. This confusion facilitates red tape, confusion and barriers to start, run and
grow SMEs in South Africa. This is despite the creation of the Ministry of Small Business
Development and the Department of Small Business Development to enhance the future of
SMEs in the country.
KEY TERMS
business plan
limited liability
business trust
location factor
close corporation
Memorandum of Incorporation
co-operative society
Notice of Incorporation
company
partnership
joint venture
perpetual existence
legal or juristic personality
sole proprietorship
Questions for discussion
1.Why is the correct legal entity of a small business so important?
2.What are the advantages and disadvantages of a business trust?
3.Assume that you are a female entrepreneur who is married to an up-and-coming
businessman who owns two business properties in the CBD of Johannesburg. The
couple also owns a house, which is registered in the husband’s name. What are the
tax implications of this arrangement when the male entrepreneur’s businesses run
into trouble?
4.Why is a business plan important? Consider this question from the perspectives
of both internal and external users.
5.What are the key sections of a business plan?
6.What are the factors to consider when deciding on the location of a small car
washing business?
Multiple-choice questions
1.The business format selected by the entrepreneur has a lot to do with the legal
personality of the business. How many of the following descriptions of a legal
personality is/are correct?
i.The business as a legal person exists independently from its members.
ii.It is perceived by the law that a legal person is similar to a natural person.
iii.A legal personality has its own assets and obligations, such as the repayment
of loans.
iv.The business’s existence is affected by changes in the number of people who
are members of the business.
a.One
b.Two
c.Three
d.Four
2.How many of the following are benefits of a business plan?
i.A business plan is a realistic evaluation of the business’s chances of success in
the marketplace.
ii.It provides a summary of the key aspects that will determine the success as
well as the main risks of the business.
iii.It is a control instrument to compare results against targeted performance.
iv.It is an important instrument to attract capital to finance the business.
a.One
b.Two
c.Three
d.Four
3.How many of the following are reasons for an entrepreneur to write a business
plan?
i.To obtain bank financing
ii.To arrange strategic alliances
iii.To obtain investment funds
iv.To complete mergers and acquisitions
a.i
b.i, ii
c.i, ii, iii
d.i, ii, iii, iv
4.What do banks use to evaluate a loan application?
i.Capital and collateral
ii.Capital, collateral, and conditions
iii.Capital, collateral, character, and conditions
iv.Collateral and character
a.One
b.Two
c.Three
d.Four
5.How many of the following are important location factors?
i.Proximity and access to the market.
ii.Availability of labour
iii.Central government policy
iv.Social environment
a.i
b.i, ii
c.i, ii, iii
d.i, ii, iii, iv
References
1.In addition to the notes below, see Havenga, P.H., et al. 2004. General principles of
commercial law. Fifth edition. Cape Town: Juta, pp. 285 –303; Delport P. New
Entrepreneurial Law. 2014. LexisNexis, pp. 14–27, 115, 123, 283, 287–290, 296–298,
300–305, 318, 344, 346, 354, 362.
2.Badenhorst, J.A. & Cilliers, J.O. 2014. Competitive advantage of independent small
businesses in Soweto. Southern African Business Review, 18(3): 1–21.
3.Cohen, T. 2015. Editor’s note: Are banks functional? Available
at http://www.financialmail.co.za/opinion/editorsnote/2015/02/05/editor-s-noteare-banks-functional. [Accessed 28 April 2015].
4.Jones, G. 2014. Small enterprises: Banks start to see the gap. Available
at http://www.financialmail.co.za/features/2014/01/16/banks-start-to-see-the-gap.
[Accessed 30 April 2015].
5.Upson, D. 2017. How South African Small Business Owners Can Overcome Economic
Uncertainty. Available at file:///C:/Users/Johan/Downloads/How%20South%20
African%20Small%20Business%20Owners%20Can%20Overcome%20Economic%20
Uncertainty%20_%20Entrepreneur.html. [Accessed 4 December 2018].
CHAPTER 4
The business environment
Johan Strydom
The purpose of this chapter
This chapter introduces the environment in which a business functions and explains how the
environment influences the development of a business organisation. This includes treatment
of the following related topics:
•Understanding environmental change;
•The composition and characteristics of the business environment model;
•The impact of the different environmental variables (the components of the subenvironments) on the daily operation of a business;
•Threats and opportunities that transpire due to the interaction of the variables in the
external environment;
•Why the business environment must be monitored; and
•How a business organisation can respond to changes in the environment.
These topics are illustrated by the De Beers case study on page 123. Both entrepreneurs
and established organisations must consider the internal and external environmental factors
that can help or hinder the development of their business. These environmental factors are
the fundamental foundation of the strategies implemented by the organisation.1 This chapter
discusses various kinds of strategies that a business can use in the changing environment.
Learning outcomes
On completion of this chapter you should be able to:
•understand the meaning of environmental change
•explain the composition and characteristics of the business environmental model
•discuss each of the sub-environments of the environmental model
•explain how each of the environmental variables in the micro-, market and
macroenvironments can influence an industry or individual business
•explain the difference between opportunities and threats in the external environment
•discuss environmental scanning as a means of managing change in the business
environment.
4.1Introduction
Society depends on business organisations for most of the products and services it
needs, including the employment opportunities that businesses create. Conversely,
business organisations are not self-sufficient, nor are they autonomous. They obtain
resources from the society and environment in which they operate. Therefore, business
organisations and society (or, more specifically, the environment in which the
businesses function) are mutually dependent.
This mutual dependence entails a complex relationship between business
organisations and their environment. This relationship increases in complexity when
certain variables in the environment (such as technological innovation or political
developments) bring about constant change that impacts the business organisation in
different ways.
The importance and influence of environmental change on the successful
management of an organisation has become acutely apparent in the last few decades
when environmental forces brought about unforeseen change. The process began with
technological innovations that are today named Industry 1.0 and Industry 2.0 (the first
was the era of mechanisation where water and steam played an important role, and the
second, new technological systems using superior electrical technology. This led to the
industrialisation era of manufacturing factories and mass production, as evidenced by
motor companies like Ford Motor Company). We have subsequently seen extreme
spikes in energy- and oil-prices, resulting in worldwide inflation and a decline in the
global economy. In the 1980s, there was a shift from local to global business (the
globalisation process), and many countries experienced fierce competition from Japan
and other Asian countries. The 1990s heralded a new age of connectivity, with the
emergence of the Internet and the World Wide Web, both of which revolutionised the
operations of business organisations. Businesses could now send their digital material
anywhere at very little cost. The spread of the commercial web browser allowed
individuals and companies to retrieve documents or web pages stored in websites and
display them on any computer screen in an easy-to-use manner.2 This heralded the
advent of the Third Industrial Revolution (called Industry 3.0). The era of Industry 4.0
(Fourth Industrial Revolution) followed hereafter. The Fourth Industrial Revolution is
based on smart machines using, inter alia, storage and manufacturing facilities that
communicate information in real time without the intervention of humans. Some of the
key elements of Industry 4.0 include the Internet of Things (IoT) and Cloud computing.
Currently there is a debate as to whether Industry 5.0 is imminent, with humans
working in close harmony with machines (computers) to improve efficiencies and
productivity in the workplace.
In the global economy the latter part of the 1990s was characterised in Western
countries by the longest-ever economic boom, which ended on 11 September 2001 with
the attack on the World Trade Center in New York. This incident heralded a new era in
world history, introducing a new world order with new alliances and new enemies. In
2008, the stock market crash on New York’s Wall Street signalled the start of a global
financial crisis, which led to economic recession in many countries. This crisis impacted
on the world economy and its after-effects are still being felt in various countries, such
as South Africa.
Coupled with this are the effects of world disunity on the political front with
problems in the Middle East and Russia, issues of migration globally, Brexit, and
perennial problems of political instability in Africa. Furthermore, the stagnating global
economy led to problems in Europe (called the European sovereign debt crisis) with
Spain, Italy and especially Portugal and Greece feeling the effects of the global recession.
Many of these European countries are in a poor financial position and unable to repay
or refinance their government debt. They are also not in a position to help their overindebted banks and are dependent on the assistance of third parties such as the
European Central Bank and the IMF to alleviate their financial problems. Obviously
South Africa was also influenced by these problems, as Europe is one of South Africa’s
main trading partners.
After experiencing many years of macroeconomic stability and a global commodities
boom, South Africa was not exempt from the worldwide crisis. The economy began to
slow in the second half of 2008 owing to decreased demand and commodity
prices.3 South Africa officially entered an economic recession in the first half of 2009,
ending one of the longest growth cycles in the South African economy. The South
African economy has just emerged from what is called a ‘technical recession’, but is
faced by slow growth which does not bode well for growth and employment
opportunities in the country in the near future.
During the period 2008 to 2012 the South African economy grew, on average, by just
2 per cent, and it would seem that this growth rate will not improve in the immediate
future. By 2014 South Africa’s GDP grew by just 1,5 per cent, while it struggled to reach
1 per cent growth per year in 2018.4
These global events and South Africa’s own political and cultural changes have all
combined to make the South African business environment more challenging. Key
infrastructural issues, such as the regular supply of basic commodities like electricity
and water, are affecting the competitive business environment in which South African
businesses operate.5
The previous decades of instability and the new era of rapid change and uncertainty
have increased business organisations’ need to try to deal with the impact of
environmental change. The result of this is a greater awareness of environmental
influences on management decisions, and the development of an approach to
investigate and monitor change in the environment, which is encapsulated in the
environmental business model discussed in this chapter.
4.2The business and environmental change
It has been said that change is a fundamental characteristic of our time and that it is the
only definite phenomenon in the management of a business.6
In the management sciences particularly, change is a difficult concept to define.
The South African Pocket Oxford Dictionary defines change as ‘moving from one system
or situation to another’.7 Expressed simply, change refers to any alteration in the status
quo. This implies a change from a condition of stability to one of instability, a shift from
the predictable to the unpredictable or from the known to the unknown. Change cannot
be measured or controlled, and it causes insecurity. No single factor can be held
responsible for it, and it occurs in different ways and at different rates depending on the
place and community in which it occurs. Moreover, the rate of change often has a
greater effect on the business environment than the direction of change, which could
possibly have been occurring for a number of years in any case.
In the second decade of the 21st century, the rapid rate of change is even more
staggering. Today the rise of a knowledge economy is characterised by an explosion of
new technologies – which, in its own right, is disruptive to the existing technologies of a
country. The introduction of social media such as Facebook and Twitter has opened a
world of knowledge and resources, connecting people all over the world.
Supercomputers, email, fibre-optic networks, teleconferencing and connection software
such as Skype allow more people than ever before to collaborate and compete in real
time with other people on different kinds of projects from different corners of the
planet and on a more equal footing than at any previous time in history. All these
changes are combined in what is previously explained as part of the Fourth Industrial
Revolution (Industry 4.0).8
Figure 4.1 shows the three sub-environments of the business environment.
Environmental variables (the components of each sub-environment) increasingly affect
the environment in which business organisations operate and make decisions regarding
investments and strategies very demanding.
Figure 4.1: The business environment
Environmental variables that are constantly changing the environment in which
business organisations operate include technological innovations (such as e-commerce,
digital marketing, secure online-payment systems and Artificial Intelligence (AI)),
economic fluctuations (such as changes in the exchange rate and interest rate),
legislation (such as South Africa’s labour laws regarding fixed-term contracts, discussed
in more detail in Chapter 12) and social factors (such as increased urbanisation and
changing social values such as taking care of retired people). During the past 26 years,
the structure of South African society and its lifestyles, values and expectations have
changed visibly, in particular since 27 April 1994, when a democratic South Africa was
formally established.
South Africa’s government brought about drastic changes – in particular, a new
social order and an economy based on socialistic principles. The democratisation of
South Africa also normalised the country’s international relations, but at the same time
exposed South African businesses to the borderless world in which they have to
compete. Another notable transformation was the initial steady economic growth that
was achieved during the first two decades of democracy.
However, by 2015 the South African economy was in the doldrums, with an
increasing debt burden that is threatening the economic survival of the South African
economy.
The South African economy is severely affected by declining investment in the
mining sector as well as in the industrial and engineering sectors. One of the few
highlights is the South African motor industry which has been a star performer in
exporting automobiles to Europe. Supply-side logjams such as electricity supply
interruptions provide an uncertain economic climate with failing infrastructure, such as
water reticulation and sanitation, impacting on the quality of life of South Africans.
In addition, South Africa is experiencing accelerating urbanisation, increased
poverty, an influx of skilled and unskilled immigrants, xenophobia and high crime rates,
all of which are affecting the South African business environment and eroding business
confidence in the country.
The following case study looks at De Beers, a big player in the South African business
environment. It shows how De Beers has experienced radical changes in the 130 years
of its existence, both in South Africa where it started out and in the rest of the world
where it is operating at present.
Worldwide, business organisations are restructuring, outsourcing and trimming
workforces. Without these major changes, business organisations would not be able to
align themselves with the realities of the changing external environment. If business
organisations do not adapt to these changes, they would not be fit to compete in the
new global economy.
Other changes that affect the business organisation include changes in monetary and
fiscal policy, which impact on financial management. Changing consumer needs, often
the result of economic and technological change, make new demands on marketing
management. Existing methods of operation can change suddenly because of
technological advances, and the introduction of new raw materials can cause
established industries to change or disappear completely. Moreover, trade unions –
through strikes and forced absenteeism – are making increasing demands on the
management of human resources. All of these changes are reflected in the De Beers case
study.
The interaction between the environment and a business organisation is an ongoing
process that often results in a new environment with new threats and
new opportunities. Management should align its organisation with the environment in
which it operates in such a way that it can identify, in advance, the opportunities and
threats that environmental change brings. It is only when management is fully prepared
that an organisation can fully utilise opportunities and deal with possible threats. To be
able to do this, managers must first understand the composition and nature of the
business environment.
CASE STUDY: How the business environment is influencing De Beers
De Beers was established in 1888 as a joint venture between Cecil John Rhodes and
Barney Barnato, who was instrumental in the development of the South African diamond
industry. Sir Ernest Oppenheimer started the Anglo American Corporation in 1917 to
develop the gold mining industry in South Africa. In 1926 he was elected to the De Beers
board after Anglo American Corporation became a major shareholder in De Beers. Two
generations of Oppenheimers followed suit to manage the business to become one of the
world’s biggest diamond suppliers with a monopoly on the extraction and selling of
diamonds. In 2012 Anglo American bought out the Oppenheimer family’s share of De Beers,
making it the majority shareholder with the remaining shares being held by the Botswana
government. Today De Beers is an international corporation with a diverse portfolio which
can be seen as a vertical integration process. It focusses on diamond exploration (finding
new sources of diamonds), diamond extraction through the mining of diamonds in various
parts of the world through open-pit mining, finding alluvial diamonds in coastal waters, and
through deep sea extraction, the trading of diamonds on wholesale level, the selling of
diamonds through its own and other diamond retail outlets, as well as manufacturing
industrial diamonds for industrial use. De Beers remains one of the leading diamond
companies in the world, with a diversified portfolio of mines in different parts of the world. In
South Africa the Venetia open-pit mine near Mussina is one of the prime suppliers of
diamonds in South Africa. This open-pit mine will also, in future, delve deeper, developing an
underground mine below the Venetia open pit area. In Botswana, De Beers has four open pit
mines, namely Jwaneng, Orapa, Letlhakane and Damtshaa. The De Beers group is also
active in Namibia, mining on land and at the Orange River mouth as well as in the Atlantic
around this area. The group also has a diamond mine at Gahcho Kué in Canada in a joint
venture with the local mining group Mountain Province Diamonds.
In its early years, when the company produced over 90 per cent of the world’s diamonds,
it was able to control the production and hence the supply of diamonds almost at will (a
typical monopoly situation). Then, from the early 1900s – when competitors began to
challenge its prominence in the supply chain of diamonds – De Beers used its position to coordinate and regulate the supply of diamonds in pursuit of price stability and consumer
confidence. Today, this could be interpreted as price-fixing and setting up a cartel. During
the 1990s, the diamond industry experienced dramatic swings in the supply of diamonds, the
world economy moved onto a low inflationary path and the industry experienced a period of
pricing pressure, causing De Beers to rethink its business model and strategy regarding the
supply of diamonds.
Today, De Beers is 130-years-old and has adapted to various changes through the
years. It has seen through two world wars and changes in government in various countries.
Its longevity is a reflection of its ability to adapt to changing situations, a long-term approach
that is needed to be successful in the diamond business, and a sophisticated approach to
sustainability that lies at the heart of its business model.
There is, however, concern over the long-term supply of diamonds with exploration
finding it more difficult to identify major new diamond deposits. Well-known De Beers mines
such as Cullinan and Finsch and the diamond mines in Namaqualand have also been sold
off, limiting its access to new diamonds sources.
However, De Beers has achieved much in recent years by reshaping the business, inter
alia, through diversifying its mining operations to all parts of the world, seeking cost and
capital efficiencies, and driving profitability. Tough decisions made in the good times helped
De Beers to prepare its portfolio for the less favourable trading conditions that it has
encountered in the past number of years. The company sees future opportunities
downstream in the value chain by extending its high-end jewellery stores: De Beers has a 50
per cent joint venture with luxury goods company Louis Vuitton Moët Hennessy (LVMH),
which has 70 prestigious houses or brands such as Hermes, Bulgari, Dom Perignon,
Glenmorangie, Guerlain and Givenchy. These brands are grouped into five different sectors:
wines and spirits; fashion and leather goods; perfumes and cosmetics; watches and
jewellery; and selective retailing. All of this indicates that De Beers has evolved from being a
producer of rough diamonds to being a retailer selling final products to well-off customers in
diverse countries ranging from the USA, the UK, Europe and new upcoming world
consumption economies such as China and India.
Sources: Robinson, T. 2004. The double-decker diamond mine. South African Process Engineer, No. 6.
Cape Town: Johnnic Communications, p. 36; De Beers. 2008. Report to Society 2008. Living up to
diamonds:
From
natural
resources
to
shared
national
wealth.
Available
at http://www.debeersgroup.com/ImageVault/Images/id_1847/ImageVaultHandler.aspx.
[Accessed
11
February
2010];
De
Beers.
2008. Operating
and
financial
review
2008.
Available
at http://www.debeersgroup.com/ImageVault/Images/id_1709/ImageVaultHandler.aspx.
[Accessed
11
February
2010];
De
Beers.
2012. Operating
and
financial
review
2012.
Available
at http://www.debeersgroup.com/ImageVaultFiles/id_1703/cf_5/_De_Beers_Operating_and_Financial_Revi
ew_2011.PDF;
De
Beers.
2014.
De
Beers
Analyst
Seminar.
Available
at http://www.angloamerican.com/~/media/Files/A/Anglo-AmericanPlc/investors/presentations/2014pres/de-beers-seminar-london-nov-2014.pdf. [Accessed 9 March 2015];
Mathews, C. 2012. Diamond De Beers. Financial Mail 216(10): 44; Mathews, C. 2015. Diamonds:
Affordable luxury. Available at http://www.financialmail.co.za/moneyinvesting/2015/01/22/diamondsaffordable-luxury. [Accessed 9 March 2015].
Critical thinking
It is crucial for businesses to pay careful attention to the constant changes in the business
environment and to react to these changes. This is especially true for global corporations
operating in South Africa. These corporations have a social contract with various
stakeholders in South Africa with a specific focus on job creation and the contribution of
these corporations to the South African economy. The South African motor industry is a star
performer, creating many job opportunities. There is, however, an increasing demand for
more highly skilled workers which puts new demands on the secondary and tertiary
education system. The question is: are there enough sufficiently qualified people to do these
jobs?
4.3The composition of the business
environment
In the latter half of the 20th century, it became very clear that the effective management
of the business organisation required management to take careful note of
environmental changes in order to develop new business strategies.
This was partly the result of the systems approach to management, which argued
that an organisation is an integral part of its environment and that management should
therefore adopt a policy of ‘organisational Darwinism’ to ensure that its business does
not become extinct in a rapidly changing world in which only the fittest can survive.
The rising instability in the environment has made it increasingly necessary to study
environmental change and influences. But the question was what exactly to look for in
the environment. It would have been hopelessly confusing to have to take every single
factor into consideration without any framework to organise information. A variety of
influences, ranging from spiritual and cultural values to purely natural influences, may
be identified as determinant variables in the business environment.9
The business environment is therefore defined as all the factors or variables, both
inside as well as outside the business organisation, that may influence the continued
and successful existence of the business organisation. In other words, the business
environment refers to the internal as well as the external factors that impact on the
business organisation, and that largely determine its success.
4.3.1The three subenvironments
In order to recognise the environmental variables that influence a business, a realistic
environmental model must be established. This is necessary for classifying the different
variables in the business environment. Classification makes it possible to identify
distinct trends per sub-category of the business environment, which enables further
analysis of these trends.
Figure 4.2 on page 127 shows the composition of the business environment (also
called the business environmental model) with its various sub-environments. It is a
visual model of the interaction between a business organisation and its environment.
According to this model, the business environment consists of the three distinct subenvironments described in the sections that follow.
4.3.1.1The micro-environment
The micro-environment consists of the business itself, over which management
has complete control. This includes variables in this environment, such as the vision,
mission and objectives of the business organisation, the various business
functions and the resources and strategies of the business, which are under the direct
control of management. The decisions made by management will influence the market
environment through the strategy employed to protect, maintain or increase the
business’s share of the market. For example, management might apply a marketing
strategy using unique products and services and effective marketing communication
activities to increase market share.
An analysis of the micro-environment allows managers to determine the
capabilities, and the strengths and weaknesses of the organisation.10 (A strength is
described as an aspect of a business that provides it with an advantage in its business
environment, while a weakness is a limitation of the business that places it at a
disadvantage). Knowing the organisation’s strengths and weaknesses puts management
in a position to use available opportunities better and to identify and counter threats to
the business, ensuring that it remains a stable entity.
The micro-environments of many business organisations worldwide have been
subjected to changes relating to re-engineering, restructuring and trimming workforces.
Without these major changes, businesses would no longer be able to align themselves
with a changing environment.
4.3.1.2The market environment
The market environment is encountered immediately outside the business
organisation (see Figure 4.1 on page 122). In this environment, all the variables
depicted in Figure 4.2 become relevant for every organisation, because they determine
the nature and strength of competition in any industry. The key variables in this
environment are the following:
•Consumers or customers with a particular buying power and behaviour who buy
the products and services of the business stand central to the business as their
reason for existence;
•Competitors, including new and potential competitors who want to maintain or
improve their market-share in the marketplace;
•The labour market and labour unions. Aspects such as the availability of skilled
labour and the impact of strikes on business are well-known variables in South
Africa and may result in the business failing and must thus be considered by the
businesses;
•Intermediaries, who compete with each other to handle (distribute) the business’s
product to get it to the consumer; and
•Suppliers, who supply, or do not wish to supply, raw materials, products, services
and finance to the business organisation to enable it to manufacture the products
and services that the consumer requires.
All of these variables give rise to particular opportunities and threats. It is in the market
environment that management finds its most important tasks: to identify, assess and
take advantage of opportunities and threats in the marketplace, and to develop and
adapt its strategies to meet competition. For these reasons, the market environment is
often called the task environment, in which top managements’ main task must be to
note changes and anticipate their impact on the business.
Management has no control over the components of the market environment,
although management may influence the relevant variables through its strategy.
However, the market environment continually influences a business, and the business
must adapt to these changes.
Figure 4.2: The composition of the business environment
For example, a new competitor with sufficient resources could start a price war, or a
competitor could market a new product protected by patents. In the case study on De
Beers, it was noted that De Beers is very aware of the limited supply of rough diamonds
and has moved downstream in the value chain (retail jewellery stores) to boost
turnover. In a most recent development, De Beers has started to manufacture synthetic
diamonds due to the pressure of competitors who have entered the market selling these
industrial diamonds. Conditions such as consumer buying power and consumer
boycotts can also affect a business. (The fictional movie Blood Diamond reflects an
increased consumer awareness of the unethical trading of diamonds sourced from wartorn countries, hence the title of the movie). Changes have been made to the distribution
system where the origin of diamonds is tracked and certified. De Beers started to use
block chain technology in 2018 to allow them to trace each diamond throughout the
entire value chain, that is, from the place of extraction to the final buyer to ensure that it
is not associated with illegal diamond trading.11
Both the market environment and the micro-environment are affected by
developments in the macroenvironment (also called the far-off or external
environment).
4.3.1.3The macro-environment
The macro-environment is the sub-environment that is external to both the
organisation and the market environment. Threats and opportunities may occur in the
macro-environment, but, as the individual business organisation has little or no control
over the macro-environment, its influence on these threats and opportunities is
insignificant. A threat can be described as an external variable in the business
environment that could cause harm to the business; an opportunity is the opposite,
namely a chance to generate more market share, turnover or profits for the business.
The macro-environment consists of six distinct components or variables:
•The technological environment, which continuously brings change and
innovation to the business world;
•The economic environment, in which factors such as inflation, exchange rates,
recessions and monetary and fiscal policy influence the prosperity of the business
organisation;
•The social environment, in which consumer lifestyles, habits and values (formed
by culture) make certain demands on the business organisation, particularly
through consumerism;
•The physical environment, which consists of natural resources such as mineral
wealth, flora and fauna, and manufactured infrastructural improvements such as
electricity supply, sanitation and roads and bridges. This is the environment in
which the business operates and where it must show responsibility towards society
by operating in a carbon-positive, or at least a carbon-neutral way in its interaction
with the environment.;
•The institutional environment, with the government and its political and
legislative involvement as the main components. By means of legislation, for
instance, governments influence business; and
•The international environment, in which local and foreign political and social
trends and events affect the business organisation (micro-environment) as well as
the market environment.
Just as there is interplay between the three sub-environments, there is interplay
between the variables peculiar to each sub-environment (for example, the interplay
between the technological and social environments). These interactions will be
elaborated on in sections 4.4 to 4.6.
4.3.2Characteristics of the business environment
The most important characteristics of the business environment are the
interrelatedness of the environmental variables, the increasing instability, the
environmental uncertainty and the complexity of the environment. A discussion of each
of these will show why it is necessary for management to monitor these characteristics
continuously.
•The interrelatedness of environmental factors or variables means that a change
in one of the external factors may cause a change in the micro-environment and,
similarly, a change in one external factor may cause a change in the other external
factors. For example, the period since 2008 has seen a slowing of the economy in
South Africa with tepid growth and a general decline in the performance of the
Johannesburg Stock Exchange (JSE) – Africa’s largest securities exchange – and a
resultant decline in the value of the rand against the major foreign trading
currencies. This, in turn, has resulted in more economic change, including job losses
and a very low labour absorption rate with thousands of young people finding it
extremely difficult to gain entry to the labour market.
•Increasing instability and change comprise one of the consequences of
interdependence in the environment and is mostly driven by innovation. However,
although the general rate of change in the environment accelerates, environmental
fluctuation is greater for some industries than for others. For example, the rate of
change in the pharmaceutical and electronics industries may be higher than in the
automobile-component and bakery industries.
•Environmental uncertainty is dependent on the amount of information that
management has about environmental variables, and on the confidence that
management has in such information. If there is little information available, or if the
value of the information is suspect, management’s uncertainty about the
environment will increase.
•The complexity of the environment indicates the number of external variables to
which a business organisation has to respond, as well as variations in the variables
themselves. A bakery, for example, has fewer variables to consider in its business
environment than a global manufacturer of computers, and therefore has a less
complex environment. It is one of the advantages of businesses with less complex
environments that they need less environmental information to make decisions.
These few exceptional characteristics of the environment show how important it is for
management to know and understand the environment within which the business
organisation operates.
Critical thinking
Business organisations should be proactive in continuously monitoring the many variables
that may influence the state of the business environment in which they operate. New
investment opportunities are based on the monitoring of these variables. This monitoring
process also forms the foundation of strategy formulation for the business. By doing this,
organisations minimise the risk of being caught off guard and maximise their ability to deal
effectively with challenges. Do you think this kind of monitoring is really done by businesses
in South Africa?
The intricacy of the business environment: Inflation illustrated
In considering the characteristics of the business environment, the economic variable of
inflation is a good example to illustrate the interrelatedness, uncertainty, instability and
complexity of the business environment. What are the various environmental variables that
might influence inflation in South Africa?
•The physical environment. Aspects such as rainfall and climate have an influence on
the inflation rate. Droughts could influence the production of maize which will have a
knock-on effect on the price of animal feed and eventually increase the price of beef, for
example. Obviously, this will impact on the food inflation rate for South African
consumers.
•Consumer buying power. An increase in consumer spending is a result of, among
other things, economic growth, low interest rates and the growth of the middle class.
Conversely, a decrease in consumer spending is a result of slower economic growth and
higher interest rates, and therefore a slower growth of previously high-potential markets.
•The international environment. The rise in the crude-oil price affects the price of fuel.
This then causes increases in the price of food and other basic commodities. Further
aspects, such as wars and piracy in the shipping lanes around the Horn of Africa, are
also affecting businesses indirectly by increasing the cost of crude oil transportation.
•The economic environment. A depreciation of the rand’s exchange rate, interest-rate
hikes and a high unemployment rate are contributing factors to a poorer economy, which
impacts on the inflation rate and affects all citizens of South Africa.
All of the variables listed above are likely to lead to acceleration in inflation in the short term.
4.4The micro-environment
As explained earlier, the micro-environment comprises the internal environment of the
business. The micro-environment may be viewed as an environment with three sets of
variables:
•The business’s vision, mission, strategies and objectives;
•The business’s management and organisational functions; and
•The business’s resources.12
These variables are instrumental in delivering the outputs of the business, and they are
under the direct control of management. An analysis of these variables will lead to the
identification of the organisation’s strengths and weaknesses, which forms part of the
environmental analysis (see Section 4.7). Each of the variables in the microenvironment is linked to the external environment in some way.
The vision, mission, strategies and objectives of the enterprise are the reason for its
existence. A vision statement answers the question: What do we want to become?
A mission statement is developed after the vision statement and answers the question:
What is our business? This question was first asked by Peter Drucker, who is viewed as
the father of modern management. A mission statement ‘can be described as the reason
why an organisation is in business and is used to distinguish one business from other
similar firms’.13 The mission statement serves as the foundation for the development of
long-term objectives, which are the specific results an organisation seeks to achieve.
These objectives must be further developed into strategies such as how to grow the
market share of the business. This may include developing new products or services.
(Without specific objectives to strive for and strategies to implement, there would be no
need for an organisation.) Examples of vision and mission statements of two fairly
similar businesses that operate in the field of logistics are given below. The South
African Post Office operates in South Africa (currently a poor performing business) and
DHL is a logistics company operating in more than 220 countries in the world.
Comparison of the mission and vision of the Post Office versus DHL
Post Office. Vision: ‘A leading provider of postal, logistics and financial services to the South
African market.’ Mission: ‘We leverage our established infrastructure and link government,
business and customers with each other locally and abroad.’14
DHL. Vision: ‘The Logistics Company for the World.’ Mission: ‘Excellence, Simply
delivered.’15
An organisation’s vision and mission statements, such as those given above, are
influenced by the external environment. For example, if there is a drastic decrease in the
demand for the South African Post Office’s services owing to changes in South African
consumer preferences for using the Post Office’s value propositions (services), it would
force the Post Office to reconsider its stated vision and mission. If this decline in the
demand for services turned out to be a prolonged social trend, the organisation might
need to reconsider its reason for existence.
The different areas of management or business functions and the way in which an
organisation is structured constitute another set of variables in the micro-environment,
which has certain interfaces with the external environment. For example, marketing is
the business function that is in close contact with the market: marketing management
keeps an eye on consumers and their preferences as well as on the activities of
competitors so that it can develop strategies to counter any influences from the market
environment. Similarly, financial management keeps an eye on levels of taxation and
rates of interest that could influence the financial position of the business. Human
resources management may influence the environment through its employment policy,
just as trade unions, strikes, the availability of skilled labour, wage demands and new
labour laws may affect its decisions from outside the business. A business should be
structured in such a way that it is able to deal with influences from the environment and
still operate productively within the environment – especially the market environment,
which is discussed in Section 4.5.
The resources of a business comprise the last set of internal variables that have
certain interfaces with external environments. These resources include the following:
•Tangible resources, such as production facilities (e.g. machines), raw materials,
financial resources, property and computers;
•Intangible resources, such as brand names, patents and trademarks, the company
reputation, technical knowledge, organisational morale and accumulated
experience; and
•Organisational capabilities, which refer to the ability to combine resources,
people and processes in particular ways.
The resources of a business organisation can be at risk from threats or they can benefit
from opportunities presented by external environmental variables. For example,
an important tangible resource such as a particular production process may be
threatened by a new technology or a new invention. Alternatively, special skills or
knowledge (an intangible resource) can be employed to exploit an opportunity in the
environment, such as when a business with knowledge and experience of exporting
takes advantage of a devaluation in the rand to make increased profits.
This also illustrates that while some business organisations are threatened by a
specific variable in the external environment, the variable may appear to be an
opportunity for other organisations. Furthermore, this shows that the microenvironment varies from one business organisation to the next.
4.5The market environment
The market environment (or task environment) is immediately outside the business
organisation, as shown in Figures 4.1 and 4.2. It consists of the market (customers, the
labour market and labour unions), suppliers, intermediaries and competitors, which are
sources of both opportunities for, and threats to, a business. More precisely, this
environment contains the variables that revolve around competition. To understand
clearly the interaction between the enterprise and its market environment, it is
necessary to examine the variables in the market environment more closely.
4.5.1The market
Several meanings can be attached to the term ‘market’, but in this context, it refers to
people who have needs to satisfy and the financial means to do so. In other words, the
market, as a variable in the market environment, consists of people with particular
demands who manifest certain forms of behaviour in satisfying those demands. (The
market is discussed more fully in Chapter 13 as part of the discussion of the marketing
function.) If a business wants to achieve success with a strategy of influencing consumer
decisions in its favour in a competitive environment, management needs to be fully
informed about all aspects of consumer needs, purchasing power and buying behaviour.
Management also has to understand that the conditions in the customer
marketplace are directly influenced by variables in the macro-environment:
demographic trends may influence the number of consumers, economic factors such as
high interest rates determine the available buying power of consumers and cultural
values exert certain influences on buying behaviour. Management should also
understand that this continuous interaction between market variables and the variables
in the macro-environment gives rise to changes in both environments.
South African businesses operate in a complex market environment, characterised
by a heterogeneous population. To determine the market for its market offering,
management analyses the total number of consumers in a specific area or market
segment and the purchasing power of those consumers by performing market research.
Purchasing power is represented specifically by consumers’ personal disposable
income. Personal disposable income is the portion of personal income that remains
after direct taxes plus credit repayments (loans from banks, shops and other
institutions) have been deducted, and is available for buying consumer products and
services.
Purchasing power therefore also serves as an interface between the macroenvironment and the micro-environment. (Other characteristics of the consumer
market that influence purchasing patterns, such as language, gender distribution and
size of family, are discussed in more detail in Chapter 13.)
The consumer market can further be subdivided as follows, according to the
products that are bought:
•Durable products (for example, furniture, domestic appliances and motor cars);
•Semi-durable products (for example, food and tobacco); and
•Services (for example, insurance, rental and Internet usage).
This classification enables management to analyse specific segments of the market
according to which products or services were purchased.
Besides the market in consumer products, there are also industrial markets (also
called the business market) in which products and services are supplied by
manufacturing enterprises for the production of further products and services.
Government markets involve the purchase of products and services by the central
government, provincial governments and local authorities. International markets relate
to foreign buyers, including consumers, manufacturers, resellers and governments.
Large and complex, the market environment must be continuously analysed by the
business organisation to function successfully. Moreover, variables in the macroenvironment, such as economic factors, political trends and upheavals, as well as
population growth and urbanisation, also influence the market environment and,
eventually, the products and services that the business offers to the market.
Critical thinking
Why salary increases do not necessarily result in more disposable income
Yearly salary increases do not seem to improve the financial well-being of South African
workers. One of the main reasons is that modest inflation-linked annual salary increases are
gobbled up by higher-than-inflation-linked increases of products and services. The prices of
electricity, petrol and consumable goods in South Africa increase at rates higher than the
inflation rate. Additional increases in taxes, such as the VAT rate, medical aid payments and
pension contributions ultimately result in the consumer’s disposable salary just not keeping
up with inflation. This is one of the reasons why many salary-earners are caught up in
borrowing money and living beyond their means by opening store credit accounts that they
eventually cannot repay. Credit bureaus in South Africa are reporting a general increase in
the debt levels of consumers, with many people borrowing money from one credit provider to
pay back another credit provider. Is this a feasible practice and what can be done about this
issue?
4.5.2Suppliers
According to the systems approach, a business organisation is regarded as a system that
receives inputs from the environment and converts these into outputs in the form of
products or services for sale in the market environment. The inputs required are mainly
materials (including raw materials, equipment and energy), capital and labour.
Suppliers provide these items to businesses. When one considers that approximately 60
cents out of every rand spent goes into purchases from suppliers, the importance of
suppliers in the market environment becomes clear. If a business cannot obtain the
right inputs of the necessary quality in the right quantity and at the right price for the
production of its products, then it cannot achieve any success in a competitive market
environment. The interaction between a business organisation and its supply chain is a
good example of the influence of environmental variables on the business.
In the case of materials, practically every business, whether it is in manufacturing,
trading or contracting, depends on regular supplies. The issue of materials
management, scanning the environment with regard to suppliers, and relations with
suppliers as environmental variables is dealt with in Chapter 15.
In addition, a business organisation depends not only on suppliers of raw materials,
but also on suppliers of capital. Banks and shareholders are such suppliers. They are
discussed in Chapter 14. Small businesses in particular find it difficult to raise capital as
they usually do not have the necessary collateral, as discussed in Chapter 3.
4.5.3Labour markets and labour unions
Businesses also need a supply of human resources. This is a special resource that has a
very emotive impact on the South African business environment as the country has a
very high unemployment rate and a dearth of skilled workers to fill positions in the
workforce. It is reported that thousands of jobs in South Africa cannot be occupied
because the appropriate skills do not exist in the supply of workers at all levels in the
economy. This problem is further exacerbated by a growing gap caused by graduates
who leave tertiary institutions without basic workplace skills.
Trade unions and other pressure groups can also be seen as trying to supply skilled
workers by their influence on government through the insistence on skills training, and
a stable environment in which job creation can occur. In the recent past, labour unions
and employers have had a tenuous relationship. In South Africa the government is
currently one of the biggest suppliers of employment, which results in an exceptionally
large wage bill with little money available for necessary infrastructural maintenance
and development. Trade unions are also in crisis with less unionised workers. With the
advent of Industry 4.0, attention must be given to the retraining of workers to provide
sustainable jobs in the future. All of this indicates that businesses must take note of
what is happening in this very dynamic part of the business environment.
The scanning of the environment with particular regard to human resources is
discussed in greater detail in Chapter 12.
4.5.4Intermediaries
Apart from the consumers and competitors with whom management has to deal in the
market environment, intermediaries also play a decisive role in bridging the gap
between the manufacturer and the consumer. Intermediaries form part of the supply
chain and include wholesalers and retailers, agents and brokers, representatives and, in
townships, spaza shops. They also include bankers, asset managers and insurance
brokers who, from a financial perspective, are also involved in the transfer of products
and services.
Decision-making by management in respect of intermediaries is complicated by the
dynamic and ever-changing nature of intermediaries. New trends and markets are
responsible for the development of new kinds of intermediaries, especially online.
Contemporary trends in South Africa in this regard are, for example, electronic
shopping, extended shopping hours, the massive increase in shopping centres in the
townships as well as the increase in the number of franchises and spazas in these areas,
the shift of power relationships from the manufacturer to large retailers because of barcoding (and the valuable information that it generates) and retailer brand names (the
retail chain stores such as Pick n Pay, Spar, Woolworths and Shoprite/Checkers are well
known for their ‘no-name’ or generic brands).
Relationships with intermediaries also complicate management’s decision-making
as they often involve entering into long-term agreements that may have certain
implications for business strategy. The power of large retailers also has certain
implications for price and advertising decisions impacting on the relationships with
manufacturers.
New trends among intermediaries provide business managers with certain
opportunities, but also hold the possibility of threats that must be investigated and
addressed.
4.5.5Competitors
Most organisations operate in a market economy that is characterised by competition in
the market environment. This means that every business that tries to sell a product or
service is constantly up against competition, and that it is often competitors that
determine how much of a given product can be sold and what price can be asked for it.
Moreover, businesses compete for a share of the market and also compete with
other businesses for productive resources such as labour, capital and materials. As a
variable in the market environment, competition may be defined as a situation in the
market environment in which several businesses, offering more or less the same kind of
product or service, compete for the patronage of the same consumers. The result of
competition is that the market mechanism keeps excessive profits in check, stimulates
higher productivity and encourages technological innovation. But while the consumer
benefits from competition, it is a variable that management has to take into account in
its entry into, and operations in the market.
The nature and intensity of competition in a particular industry are determined by
the following five factors (also called the competitive forces):
•The threat of new entries to the market. Any profitable market will attract new
entrants, which reduces the profitability of the existing businesses. Having no
barriers (e.g. no economies of scale) to protect the market will result in new
competitors which reduces the profitability of the existing businesses.
•The buying power of clients and consumers. The stronger the buying power of
clients and consumers is, the less bargaining power the business has, resulting in
lower prices that can be charged. Having a few powerful buyers means that the
business will have to accept the terms and process dictated by these buyers.
•The strength of suppliers. Similar to the strength of clients and consumers, the
existence and strength of suppliers may affect the price that can be charged for the
developed product. If the supplier has a unique component that you need to
manufacture the product, then obviously this supplier has a dominant position in the
market.
•The number of competitors in the market. Having many competitors that all
deliver an undifferentiated product to the market will reduce the attractiveness of
the market.
•The threat of substitution products availability. If there are close substitute
products available there is an increasing chance that the customer will switch to a
substitute product whenever the price of your product increases. This reduces the
attractiveness of the market.
These five factors are taken into account when business strategists want to determine if
new products or services have the potential to be profitable in the marketplace. The five
factors can also be used to identify areas of strength or weaknesses of a business.
The collective strength of these five forces determines the competitiveness in the
industry, and therefore the profitability of participants in the industry. Competition
varies from intense, in industries such as tyres and retailing, to moderate in the mining
and cooldrink industries. The weaker the five forces are, the better the chances are of
survival and good performance. Digital technologies and the Internet have also
contributed to an increase in competition. E-commerce has reduced entry barriers,
widened the geographical span of markets and increased price transparency. It is
therefore an important task of management to find a position in the market where the
business can successfully defend itself against the forces of competition. The alternative
would be to find a position where the business can influence the forces of competition
in its favour. This is usually the case when the business is the market leader in turnover
or profitability in the specific industry.
Continuous monitoring of competition provides the basis for the development of a
strategy. It emphasises the critical strengths and weaknesses of the business, gives an
indication of the positioning strategy that should be followed, singles out areas in which
strategy adjustments can contribute to higher returns, and focuses on industry trends in
terms of opportunities and threats.
The scanning of the market environment for opportunities and threats entails an
examination of variables such as the economy and the technology in the macroenvironment, as well as trends in the variables within the market environment, namely
those factors that influence consumer spending, the labour market, suppliers and
competition in the market.
In the market environment, the interaction between a business and its suppliers, the
labour force and labour unions, consumers and competitors can result in opportunities
or threats to a business. Management must be aware of the trends in the market
environment so that the business can exploit opportunities profitably and avoid threats
in good time. Environmental scanning, market research and information management
are the proper instruments with which to do this (see Chapter 13).
4.6The macro-environment
4.6.1The composition of the macro-environment
Apart from the market environment, which has a direct influence on the fortunes of a
business, there is a wider macro-environment within which a business also operates.
This wider macro-environment has variables that directly or indirectly exert an
influence on a business and its market environment. These variables constitute the
uncontrollable forces in the external environment that are sometimes referred to
as mega-trends.
As Figure 4.2 shows, the macro-environment is divided into six variables or
components that a business organisation has to observe and respond to: the
technological environment, the economic environment, the social environment, the
physical environment, the institutional-political environment and the international
environment.
Macro-variables (variables that exist in the macro-environment) have an effect not
only on the market environment and on decisionmaking by management, but also on
one another, and this constantly causes change in the business environment. In a
democratically elected state, the community (which is also the consumer), with its
particular culture and values, decides which government it wants, and gives the
government a mandate to form a certain governmental structure, which in turn
determines the affairs of the community. Therefore, politics is interwoven with the
economy and is influenced by the policies adopted and the economic measures taken to
achieve political ends. The result is a certain standard of living for the community.
Stimulated by the needs of the community, and with the support of the economy and
the government, it is technology that is mainly responsible for the rate of change in the
business environment. Social trends also influence politics and the economy. The
international environment acts as a considerable force for change in the other variables
and therefore in the total business environment. The result of this interaction is often a
changed business environment, with new opportunities and new threats.
In studying the macro-environment, the emphasis is on change caused by the
uncontrollable macro-variables and the implications for management. Let us look now
at these macro-variables.
4.6.2The technological environment
Change in the environment is generally a manifestation of technological innovation or
the process through which human capabilities are enlarged. Technological innovation
originates in research and development (R&D) mainly by business, universities and
governments. This technological innovation results not only in new machinery or
products, but also in new processes, methods, services and, even approaches to
management, which bring about change in the environment. Table 4.1 illustrates how
the moving assembly line in car manufacturing that forms part of Industry 2.0 (a
production process that started just over 100 years ago) enlarged human capabilities
and brought about widespread change.
The introduction of the moving assembly line (one of the technological wonders of
that time) by Henry Ford in 1913 resulted in a radical reduction in manufacturing effort
and costs. Moving from the craft manufacturing process where every car was seen as an
individual project to mass production, which was a continuous production process,
improved productivity dramatically. Between 1908 and 1913, improved productivity
enabled the price of the Model-T Ford to be cut from US$850 to US$360. Consequently,
the car was no longer only available to the wealthy elite, but also to a broader section of
society, including Ford’s own factory workers, thus expanding the target market for
Ford’s automobiles.16
Table 4.1: Craft versus mass production at Ford (1913–1914)
Technological innovation also affects other environmental variables. The economic
growth rate, measured in terms of GDP, is influenced by the number of new inventions.
Social change, in which the appearance of a new product (such as high-definition
television or the most recent iPhone) brings about a revolution in people’s lifestyles, is
also partly the result of technology. Conversely, these variables influence technology,
and so the process of innovation and change is repeated.
Technological breakthroughs such as cellphones, fibre optics, arthroscopic surgery,
bullet trains, voice-recognition computers and the Internet result in new products and
services for consumers, lower prices and a higher standard of living. But technology can
also make perfectly working products obsolete – such as the dot matrix printer which,
today, is used for only certain security purposes and has been replaced generally by
laser and 3D printers.
Every new facet of technology and every innovation creates opportunities and
threats in the environment. Television was a threat to films and newspapers, but at the
same time it presented opportunities for satellite communications, advertising and
instant meals. The opportunities created by computers and the Internet in banking,
manufacturing, transport and practically every other industry are innumerable.
Moreover, technological innovation often has unpredictable consequences. For example,
the contraceptive pill meant smaller families, more women at work, and therefore more
money to spend on holidays and luxury articles that would previously not have been
affordable. The most outstanding characteristic of technological innovation is probably
the fact that it constantly accelerates the rate of change.
A further characteristic of technological innovation that impacts on management is
the fact that inventions and innovations are unlimited. Technology influences the entire
organisation. The most basic effect is probably higher productivity, which results in
keener competition. The ability to produce more and better products threatens
organisations with keener competition, compelling them to re-assess factors such as
their vision, mission, objectives, strategy, organisational structures, production methods
and markets. Superior management of technology within the organisation can be an
important source of competitive advantage.
Continued assessment of the technological environment should include the
following:
•The identification of important technological trends;
•An analysis of potential change in important current and future technology;
•An analysis of the impact of important technologies on competition;
•An analysis of the business’s technological strengths and weaknesses; and
•A list of priorities that should be included in a technology strategy for the
organisation.
In a developing country such as South Africa, managers should continually assess
technology trends that revolve around the following:
•Water technology. South Africa’s water resources can sustain only 80 million
people. SABMiller is a prime example of an organisation that is managing its natural
resources efficiently. The world’s consumption of water has grown at about twice
the rate of its population in the past century alone. South Africa has its own unique
problems with water resources, such as the ones seen with the acid mine water
problem, as well as the deterioration of the quality of water of the major rivers in the
country.
•Mineral technology. South Africa has vast mineral resources, and new ways to
improve the processing of its mineral treasures should continually be assessed.
Currently, hydraulic fracturing is in the news. It is expected to deliver petroleum and
gas which will be used to alleviate dependency on imported petroleum products.
There is, however, strong antagonism from environmentalists towards this type of
extraction, with critics pointing to the dangers of contamination of groundwater, and
the subsequent negative impact on humans. See also the De Beers example
discussed previously where new mining techniques are being used to extract
diamonds from the Venetia diamond mine.
The threat of acid mine water
Disused mines are scattered over the northern provinces of South Africa and a number of
poorer communities are living on this disused land. This land has been contaminated with
high concentrations of cobalt, zinc, arsenic and cadmium, all known carcinogens, as well as
high levels of radioactive uranium, all of which are extremely harmful to humans. Added to
this is the problem of acid mine drainage (AMD) that is already decanting into the rivers of
South Africa. AMD is a process that is found where mining activities have occurred below
the water table. Pumps must drain the water that streams into the mine to prevent flooding.
When the mine is eventually abandoned, the pumping stops and the subterranean water
floods the mine, eventually seeping out of the mine at ground level.
•Marine technology. This is needed to utilise South Africa’s vast coastal and oceanic
resources. Refer to the De Beers case study, which refers to the mining of alluvial
diamonds at the coast between South Africa and Namibia.
•Agricultural and veterinary technology. South Africa is one of few countries that
allow the genetic modification of crops. Genetically modified (GM) maize and corn
can, for example, make crops more drought resistant, but also pose threats to
biodiversity. Technology in this area therefore needs to be assessed continually to
find a balance between providing food to the African continent while still preserving
Africa’s wildlife and tourism.
•Medical technology. This technology is used to assist the population in extending
life expectancy, preventing epidemics and supporting the sports industry, among
others, which is a growing billion-rand industry in South Africa.
•Transport technology. This is needed to provide transport for people who reside
far from their places of work. Transport in South Africa is an increasingly important
issue because of the country’s continuing urbanisation. The Gautrain is one example
of the use of transport technology to solve mass transportation problems.
•Power technology. This is needed to harness cheaper and environmentally
friendly forms of power, such as solar power. The need for power or electricity in
South Africa has increased exponentially in recent decades. South Africa’s current
infrastructure cannot support this increased demand, and power failures and load
shedding have become a standard occurrence. Apart from causing inconvenience,
the continued lack of sufficient power reserves has led to the cancellation of
downstream beneficiation facilities for certain raw materials in South Africa. This
has obviously had some negative consequences for employment opportunities and
capital investment and is reducing the country’s economic growth rate.
Technological progress affects a business as a whole, including its products, its life cycle,
its supply of materials, its production process and even its approach to management.
These influences all require management to be increasingly on the alert regarding
technological change.
Technology and changes in lifestyle
Technology has an immediate and lasting impact on society in general and on people’s lives
in particular. Some of these changes include the following:
•In the early 19th century, railways opened up the hinterlands of America and England.
•In the 19th century, electricity began to revolutionise people’s lifestyles through the
introduction of washing machines and refrigeration.
•Since the beginning of the 20th century, the motor car has brought radical changes to
the development of cities and the workplace.
•The advent of the passenger jet in the 1950s transformed tourism into the world’s major
industry within a few decades. The Boeing 747 aircraft is seen as the vehicle that
opened up air transport to the masses, resulting in cheap airfares, and a massive
increase in exotic holiday destinations across the world.
•People are now experiencing the impact of micro-electronics. What used to be a roomsized computer is now found in a miniature chip. The effect of micro-electronics is that it
results in ever-smaller units of production that nevertheless yield the same, or even
improved, returns.
•Advances in nanotechnology are now dramatically changing industries such as
healthcare and mining. Miniature robots are circulating in human arteries to fix lifethreatening sicknesses such as clogged arteries.
•Cellphones have revolutionised communication and are seen as merging different
products into one – for example, the use of cellphones to access the Internet has almost
obviated the use of personal computers.
•The Internet has created opportunities for real-time social networking across the globe
by means of web-based applications such as Facebook and Twitter (which more and
more business executives are using to market their firms). There is growing evidence
that more consumers are using online purchasing as the default option when shopping
for a wide range of products. The success of Takealot and Parcelninja during Black
Friday sales bears testimony of this growing trend.
Critical thinking
The management of a state-owned enterprise, especially one on which citizens of a country
rely heavily, has repercussions on the day-to-day livelihood of all consumers in South
African society. Currently Eskom and SAA are in the news, demanding massive amounts of
money from government to resuscitate and keep these businesses afloat. The question has
to be asked: could this money not be better spent on more worthwhile projects to uplift the
South African economy and its population?
4.6.3The economic environment
After technology, which is primarily responsible for change in the business
environment, there is the economy, which is influenced by technology, politics, and
social and international environments, and in turn also influences these variables. These
cross-influences continuously cause changes in, for example, the economic growth rate,
levels of employment, consumer income, the rate of inflation, interest rates and the
exchange rate. Ultimately, these economic forces have implications for management
that must be considered.
Inadequate power supply and production17
Eskom has the monopoly in electricity generation in South Africa. In the past few years,
Eskom has found itself in a position where electricity demand has exceeded supply. In an
attempt to manage the energy shortage and to try to meet demand, Eskom used a lastresort measure that interrupted electricity supply to certain areas of South Africa. This is
termed load shedding. Eskom’s load-shedding programmes reached a climax in the last
quarter of 2014, severely affecting South Africa’s economy and productivity, especially in the
manufacturing and mining sectors. Load shedding therefore not only affected businesses
and industries, but also had a negative effect on South African households and the economy
in general.
During the load-shedding period, businesses and households invested in alternative
energy supplies (such as solar power, biomass processes that deliver methane gas, wind
farms, and generators). Government is also interested in developing alternative energy
sources and has been in discussions with private suppliers of alternative energy to
supplement the electricity supply grid.
Currently there is general concern about a number of issues at Eskom. These issues
include the instability of available power plants, the financial liquidity of the utility that is being
hammered by the use of very expensive diesel to maintain a constant supply of electricity,
the unreliable supply of electricity, the slow progress with the build programme of new power
stations, and the time and cost overruns at Medupi and Kusile power stations, which have
doubled the cost and time frames for delivery. All of this is impacting on the growth
prospects of the South African economy which is very dependent on a stable electricity
supply.18
The question arises, is alternative electricity source generation a viable option to
alleviate the pressure on Eskom? Is there a life off the national electricity grid for South
African businesses and consumers?
The economic well-being of a country, or its economic growth rate, is measured by
the range and number of products and services it produces. Expressed in monetary
terms, this standard is known as the gross domestic product (GDP), which is the total
value of all the products and services finally produced within the borders of a country in
a particular period (usually one year).
A high economic growth rate of around 7–8 per cent per year or more in real terms
signals an economy that is growing quickly enough to create jobs for its people, exports
more products than it imports to sustain a positive trade balance and a stable currency,
and provides its people with an improved standard of living. A low economic growth
rate, especially one that is below the population growth rate, usually lowers people’s
standard of living.
Between 1999 and 2006, South Africa saw the longest period of uninterrupted
economic growth in its history. In fact, during the second quarter of 2006, GDP grew at
an annualised rate of 4,9 per cent, one of the highest rates in the world at that stage.
Although South Africa needs a growth rate of over 7 per cent per year in real terms to
provide jobs for the millions in the unemployment queue, the economic story until 2008
was a relatively good one.20 The 2008 world economic recession, however, also affected
the South African economy, resulting in job losses and lower profitability for businesses.
By 2018 the South African economy was growing at a sluggish rate of below one per
cent and it is estimated that South Africa will struggle to obtain a growth rate of above 2
per cent per annum in the immediate future.
A country’s economic growth rate influences consumers’ purchasing power, which
can, in turn, give rise to changes in both spending behaviour and the type of products or
services purchased.
Management must take note of structural changes in the incomes of different
consumer groups and adjust its strategies accordingly. In addition to monitoring the
economic growth rate, management must also monitor the business cycle very carefully.
The correct assessment of upswing and downswing phases in the economy is essential
to the strategy of any business. If management expects a recession, it can, for example,
reduce its exposure by decreasing inventory, thereby avoiding high interest-rate costs.
Any plans for expansion can also be deferred.
In an upswing (or boom period), the right strategy may be to build up sufficient
inventory in good time and to carry out whatever expansion is necessary.
Inflation, like economic growth, is an economic variable that affects the decisions
management has to make. During the 1960s, South Africa had a very low inflation rate,
but from the mid-1970s, double-digit inflation became a regular phenomenon. From
1974 to 1992, the average annual rate of consumer price increases amounted to 13,8
per cent. But since 1993, single-digit price increases, comparable to those of the early
1970s, were again recorded because of improved monetary discipline. South Africa is
using an inflation-targeting policy to keep the inflation rate in check. The South African
Reserve Bank sets an explicit target inflation rate for the period and uses mainly
interest rates as its main instrument to keep the inflation rate within the established
band of 3 to 6 per cent per annum.21
The costs and effects of inflation on a business need to be analysed and managed on
a permanent basis. Inflation increases the costs for exporting industries and also for
local industries competing against imported products. When a country’s inflation rate is
higher than that of its major trading partners and international competitors, there is a
reduction in its international competitiveness. This is still the case with South Africa
because its inflation rate is still higher than most of the world’s important trading
countries.
Another economic variable affecting a business and its market environment is the
government’s monetary policy. This influences the money supply, interest rates and
the strength of the currency, and therefore has important implications for management.
High interest rates result in a high cost of credit, which tends to modify behaviour and
results in a subsequent decline in consumer spending and fixed investment. South
Africa’s prime interest rates remained stable at 9,25 per cent for an extended period,
but the prime rate increased to 10,25 per cent in November 2018 with further rate
increases very likely in the immediate future.
The government’s fiscal policy, in contrast, affects both businesses and consumers
through taxation and tax reforms.
The economic trends discussed above demand constant examination by the
management of a business.
4.6.4The social environment
The environmental variable that is probably most subject to the influence of other
variables (especially the impact of technology and the economy) is the social
environment. This affects the management of a business indirectly in the form of
changing consumer behaviour and directly through the employees who work for the
business.
Humans are largely products of their society. As members of a particular society,
they accept and assimilate their society’s language, values, faith, expectations, laws and
customs. The way of life of a group of people influences the individual’s way of life, so
consumption cannot be explained solely in economic terms. Consumption is also a
function of demographic change.
4.6.4.1Demographic change
Demographic change is change in the growth and composition of populations.
Demographic change is probably the social variable that causes the most change in the
market. It does so by altering people’s ways of life.
Societies in the developed world are characterised by falling population-growth
rates and shrinking families, with the emphasis on smaller consumer units. There are
growing numbers of one-person households and, consequently, a growing demand for
services. There is also a growing population of ageing, affluent people, whose needs give
rise to special business opportunities, such as in the tourism and the secure old-age
living industry.
In the developing world, population growth and poverty remain prominent issues,
causing great concern to governments, policy-makers and environmentalists. The
concerns surrounding high population-growth rates in developing countries revolve
around poverty, the supply of infrastructure, pollution and degradation of the
environment, as well as illness and famine. More than a third of the world’s population
is living below the poverty line and is in danger of starving. All of these concerns have a
profound effect on business, especially in Africa. Currently, South Africa accounts for a
third of all new HIV infections in Southern Africa, with more than 4,4 million people on
antiretroviral (ARV) treatment.22
Demographics and its impact on consumer behaviour24
Customers are, in general, influenced by various factors when they make purchasing
decisions. Some of these influences can be broken down geographically, with the subSaharan Africa region having its own unique purchase decisions. Nigeria, as the largest
economy in Africa, has little racial diversity, with African people making up the majority of the
population. This fact makes it easier for businesses such as food manufacturers to identify a
target market as there are more commonalities in food culture and food consumption
patterns. The consumer’s purchase decision is also influenced by culture. In Nigeria, for
instance, women are considered homemakers. They make most of the purchase decisions
regarding consumer products.
Customers in Kenya mainly eat the staple food ugali (maize meal), as has been the
tradition for centuries. Introducing new food products that challenge tradition is perplexing,
making the entry of new rival foods difficult in this country. Household income size also plays
a role in the buying behaviour. In Kenya, household income is low, which restricts growth
opportunities and the acquisition of non-essential products as customers focus on acquiring
basic food products. Packaging sizes are also bigger due to average family sizes being
larger, making larger packaging more economical.
South Africa, as the second-largest economy in Africa, has multiple race groups and a
more diversified cultural profile that requires manufacturers and retailers to cater for many
needs in various sub-markets. On the other hand, it also provides opportunities as
customers are more amenable to trying out different foods. Here, the different cultures make
customers aware of various food products such as pizza, hamburgers and fries, Chinese
food, Thai food and Indian food. This broadens the scope of selling more specific foods such
as pizza. Incomes are higher than those in other African markets, creating more
opportunities for retailers to sell luxury products in South Africa. The size of South African
households is also smaller, allowing manufacturers and retailers to sell products in smaller
packaging sizes.
The most recent estimation of the total population in South Africa stands at 57,73
million people in 2018 up 325 per cent from 17.4 million in 1960.23
Changes in population-growth patterns, as well as other demographical factors such
as age, have an effect on consumers’ needs, income and behaviour.
4.6.4.2Urbanisation
Changes in population-growth patterns are influencing the geographical distribution
and mobility of the world’s population.
The movement of people from rural areas towards cities is known as urbanisation.
Urbanisation is one of the foremost trends of the world’s population. Estimates of the
future spread of urbanisation are based on figures which show that in 2018, more than
70 per cent of the populations in Europe (74,5 per cent), North America (82,3 per cent)
and other richer developed nations were already living in urban areas. Although Africa
and Asia compare weakly, with 42,5 and 49,9 per cent respectively living in urban areas,
the highest growth rate in urban populations is found in developing regions. In 2018,
the proportion of the global population living in urban areas had increased to 55,3 per
cent and is expected to rise to 68 per cent (adding another 2,5 billion people) by 2050,
with millions of people joining towns and cities in Asia and Africa. 25 Urbanisation
therefore affects businesses in many ways, especially in the areas of housing, sanitation,
slum control and health services.
4.6.4.3Level of education
Another social trend that will greatly affect management is the level of education of the
population. Where the level of education is increasing, this will, on the one hand, raise
the level of skills of both managers and workers and, on the other hand, will result in an
increased demand for books, magazines, newspapers and online information resources.
There is a commitment from government to pursue a strategy of improving the tertiary
qualifications level of South Africans, and in 2017 it was announced that free higher
education will be introduced for all deserving candidates. This will be phased in over a
period of time and will cost the government and the taxpayer billions, placing a further
demand on the list of ever-increasing demands on the budget.
Urbanisation and the consumption of milk in Africa26
There has long been a belief that fresh milk bought daily is the right thing for growing
children to drink. It will therefore come as a surprise that ultra-high-temperature (UHT) milk
sales in South Africa is expected to reach an estimated value of USD 1185,3 million in 2019.
Various reasons are given for why UHT milk has outsold fresh milk in South Africa. Some of
these are as follows:
•A growing urbanised middle class. Urbanised people prefer using UHT milk as most of
them acquired the taste growing up. There is also the convenience factor of long life that
makes UHT milk attractive to these customers.
•Another reason for the preference for UHT milk is a lack of electricity and fridges, with
one third of the population not having access to refrigeration. Eskom’s load shedding is
also influencing the sale of fresh milk.
•Africa, as a developing market, promises outstanding growth opportunity for milk
producers due to the increase in the size of the middle class, urbanisation and the low
consumption of milk. The inconsistent supply of electricity will be a growing problem for
milk distributors, overcome only by the substitution by other milk products such as UHT
milk and milk powder.
Higher education levels has resulted in lower unemployment27
In South Africa’s 2011 Census, it was found that 66 per cent of South Africans with no form
of education were living in poverty. Completing primary schooling reduced the poverty level
to 55 per cent, while completing secondary schooling resulted in only 23,6 per cent living in
poverty. Obtaining a higher education qualification at tertiary level reduced the chances of
poverty further to 5 per cent. In research done in 2016, 85 per cent of scholars aspire to get
a university education as tertiary education is seen as a way to obtain a well-paid job. It is
reported that the unemployment level of graduates is 7 per cent while 26 per cent of other
young people remain unemployed.28
4.6.4.4The changing role of women
Another social variable with clear implications for management is the changing role of
women in developed societies. As recently as 17 years ago, 60 per cent of American
women believed that a woman’s place was in the home. Now only 22 per cent are of that
opinion. The percentage of top female managers in South African businesses now stands
at 29 per cent.29 There is great concern about this trend and much research has been
undertaken in this regard to understand the stagnation in the appointment of top
female managers in large businesses and government institutions.
4.6.4.5Consumerism
A further social trend to be considered is consumerism, the social force that protects the
consumer by exerting legal, moral, economic and even political pressure on
management. This movement is a natural consequence of a better educated public that
resists such things as misleading advertisements, unsafe products, profiteering and
other objectionable trade practices, and presses for the rights of the consumer. In a
market system, these rights are generally recognised as the following:
•The right to safety, which entails protection against products that may be
dangerous or detrimental to life or health;
•The right to be informed, which means objective information is provided to
enable the consumer to make rational choices;
•The right to freedom of choice, which entails giving the consumer access to
competitive products or substitutes, and protects against monopolies; and
•The right to be heard, which means that consumers are given the assurance that
their interests will receive attention from the government and related parties.
The South African government, through the Department of Trade and Industry (the DTI)
is responsible for the application of the Consumer Protection Act (No. 68 of 2008).
Various institutions are involved in the policing of the act.
4.6.4.6Social responsibility and business ethics
Another important aspect of the social environment is the pressure that society exerts
on business organisations, forcing them to seek legitimacy by being socially responsible.
This means that business organisations should not only seek to maximise the value for
their shareholders, but also constantly consider the consequences of their decisions and
actions on society. Well-known management scholars Ghoshal, Bartlett and Moran
maintain that organisations should seek compatibility of their own interests with the
interests of society while striving for overall value creation.30 Consumers are realising
that although businesses produce much of what is good in society, they also cause great
harm. Management is mostly criticised for misleading advertising, dangerous products,
pollution of the environment, job lay-offs, industrial accidents, exploitation of the
consumer and other consequences.31 Organisations are therefore called upon to be
socially responsible.
Corporate social responsibility (CSR) can be defined as ‘the broad concept that
businesses are more than just profit-seeking entities and, therefore, also have an
obligation to benefit society’.32
While profits and employment remain important for the stakeholders, many other
factors are included in assessing the performance of a business. These include equity or
the empowerment of designated groups (economically and managerially), housing,
response to environmental concerns, provision of a responsible and safe workplace,
care about health issues and involvement with communities.
Some businesses perform an annual social audit to measure their social
performance. Based on the results of the social audit, a business can review its social
responsibility. However, the crux of social responsibility is the community’s insistence
that a business is a good corporate citizen in every respect – one that produces profit for
owners and investors, but simultaneously markets safe products, combats pollution,
respects the rights of employees and consumers, and assists the disadvantaged. In short,
businesses are expected to promote the interests of society.
In South Africa, corporate social responsibility seems to play an especially important
role. The government alone cannot be expected to rectify the inequities of the past at a
rate that is fast enough to alleviate poverty. Though South African businesses spend
millions on social investment, they remain under pressure to uplift the disadvantaged.
In future, in South Africa and elsewhere, pressure will intensify and may even give rise
to a more regulatory environment.
Table 4.2 shows the various aspects according to which society judges a business’s
social performance.
Table 4.2: The social responsibility of business
Area of social
responsibility
Issues in social
responsibility
Laws/regulations pertaining to social respon
Social responsibility to
employees (workplace
responsibility)
•Equal employment
opportunities
•Developing a quality
workforce (training and the
skills-development levy)
•Gender inclusion
•Access for disabled persons
•Sexual harassment
awareness
•Respect for diversity
•Safe working conditions
•Employment Equity Act (No. 55 of 1998)
•Skills Development Act (No. 97 of 1998)
•Gender Equality Act (No. 39 of 1996)
•Mine Health and Safety Act (No. 29 of 1996)
•Public Service Amendment Act (No. 30 of 2007
Social responsibility to the
consumer and customers
•Safe products and services
•No misleading advertising or
communication
•Proper information about
products and services
•Consumer Protection Measures Act (No. 95 of
•Consumer Protection Act (No. 68 of 2008)
Responsibility to the
investor and financial
community
•No deceptive accounting
reports
•Accuracy of financial
reporting
•No insider trading
•No bribes to customs or
other government officials
•South African Statement of Generally Accepted
Practice (GAAP), as approved by the Accountin
•The ‘Code of Corporate Practices and Conduct
principles of good governance, as set out in the
2009, and the King IV Report on Corporate gove
Africa of 2016.
Social responsibility to the
general public
•Natural environment issues,
including conservation and
pollution control
•Public health issues such as
HIV/Aids
•Housing for the poor
•Philanthropic donations
•Social welfare
•Avoiding unlawful
competition
•World Heritage Convention Act (No. 49 of 1999
•Housing Act (No. 107 of 1997)
•Welfare Laws Amendment Act (No. 106 of 1996
As a concept, business ethics is closely related to social responsibility, except that
business ethics has to do specifically with the ethics or the ethical behaviour of
managers and executives in the business world.
Ethics can be defined as ‘a guide to moral behaviour based on culturally embedded
definitions of right and wrong’.33 Managers, in particular, are expected to maintain high
ethical standards.
At issue here is the integrity of entrepreneurs and managers, and the degree to
which their decisions conform to the norms and values of society. Business ethics
revolves around the trust that society places in people in business and the obligations
that these businesspeople have towards society.
Greed, seen as a disproportionate desire to obtain more (money or assets) than is
needed or warranted, results in accusations about the exploitation of workers and
consumers, and questions about the abuse of positions of trust. This has caused the
ethical conduct (business ethics) of entrepreneurs and managers to be questioned in
South Africa. Criticism has also been aimed at the core essence of the economic system
of capitalism. Capitalism survived its main rival, the command economy (also called
communism), and has since been feted as the best available economic system in the
world. Since the depression of 2008, the suitability and sustainability of unbridled
capitalism has been brought under the spotlight. Worldwide, there are instances of
businesses and managers having misused capitalism to their own advantage – such as
Enron and Tyco in the USA and Saambou, LeisureNet, the African Bank saga and
Steinhoff in South Africa. These can be seen as cases where greed triumphed over basic
economic common sense and where the basic principles of the renowned economist
Adam Smith’s ‘invisible hand’ failed to rein companies in that were overly dominant in
their markets. This resulted in business thinkers postulating new economic theories
aimed at creating more social harmony and more meaningful social relationships
between society, stakeholders and businesses in general. In fact, there is now a drive to
obtain a better balance between business and society’s best interests with the ultimate
aim of fairness and human integrity.
South Africa as a country is also under scrutiny regarding unethical behaviour.
Walmart, the global retailing chain that started operations in South Africa when it
acquired Massmart, has identified South Africa as one of the five countries with the
highest corruption risk. The other four countries were Brazil, China, India and Mexico.
Corporate governance was institutionalised by the publication of the King Report on
Corporate Governance (King Report I) in November 1994. This was superseded by the
2002 King Report on Corporate Governance in South Africa (King Report II). The
purpose of the Code of Corporate Practices and Conduct contained in these reports is to
promote the highest standards of corporate governance, and therefore business ethics,
in South Africa. The King Report on Corporate Governance (King Report III) of 2009
updated the earlier reports, incorporated a number of important changes, and took
effect on March 2010.34 In 2016 the King IV Report on Corporate Governance for South
Africa was introduced to further strengthen corporate governance in South Africa.
Many South African organisations, however, have responded to the call for socially
responsible and ethical behaviour. Chapter 5 discusses ethics and social responsibility
in more detail.
4.6.4.7HIV/Aids
HIV/Aids is a huge social problem. It is estimated that the population of South Africa
could have been 4,4 million larger if it were not for Aids. Information estimates are that
18, 8 per cent of the population between the ages of 18 and 49 have contracted
HIV/Aids. It is further estimated that the total number of people living with Aids in
South Africa was 7,2 million in 2017.35
Management needs to take cognisance of this global problem and develop strategies
and programmes to deal adequately with HIV/Aids in the workplace as it impacts on
workers employed by the business.
4.6.4.8Culture
Culture is another social variable that influences organisations in a number of ways. In
South Africa, new cultural values are emerging among young urban black people. For
example, the extended family living under one roof is falling out of favour, women have
become more independent, and negative attitudes towards marriage and large families
are frequently expressed. The shape of the market, the influence of the culture that
currently enjoys political power and the attitude of the workforce are only a few of the
numerous ways in which culture can affect an organisation.
Social problems such as the HIV/Aids epidemic and poverty bring about
developments that cause change in the environment. Management cannot afford to
ignore these social influences.
4.6.5The physical environment
The physical environment refers to the physical resources that people (and businesses)
need to support life and development, such as water, air, precipitation, the oceans,
rivers, forests and so on. Environmentalists warn that if the biomass, which maintains a
life-sustaining balance, is damaged beyond repair, human beings will simply cease to
exist. With approximately 7,4 billion people36 relying on the resources of the same
planet, governments and businesses are now beginning to realise that the plundering of
physical resources may endanger countries and even continents.
Currently, the numbers of domestic stock are too high, and the quantity of crops and
other biomaterial that people extract from the earth each year exceeds, by an estimated
20 per cent, what the planet can replace.
The influence of generations on the business37
There are different generations at work in the South African workplace and there is strong
evidence that generations differ regarding social behaviour and consumption patterns.
Generations can be described as a group of people who share a number of similarities (such
as years of birth, age and memories) and significant life events (such as growing up during a
depression or under a specific political dispensation). There are, broadly speaking, four
generations at this time:
1.The silent generation, also called the traditionalists, is the generation born before the
Second World War (1939). This generation has encountered special circumstances
such as a world war with all its deprivations, and an explosion of new workplace
technologies, ranging from fax machines to computers and cellphones. They are
traditional, believe in hard work and being loyal to the business for which they work and
to family, friends and their country. This affects their consumption patterns.
2.The baby boomers are so named because they were born in the period just after the
Second World War when there was an upsurge in the population with all the returning
soldiers settling in to find a job and get married. This generation was born after 1945
until 1965. They are optimistic team players who expect nothing for free and believe in
hard work.
3.Generation X is the generation born from 1965 until the mid-1980s. They generally
have a more cynical and jaundiced view of life. They are characterised by being more
independent, and they question authority.
4.The millennials were born between 1985 and 2005. They are seen as more entitled,
slothful, disrespectful of authority, and even egotistic. They are the users of social
media platforms such as WhatsApp, Twitter and Skype, which has led them to keep
their communication style short and direct. This affects their communication practices in
the workplace.
Chapter 12 discusses generations further.
Regarding the physical environment, the issues of most concern include:
•Overpopulation. Despite a slowdown in world population growth, the number of
people is still rising. In poor countries, mostly in Asia and Africa, population growth
leads to land degradation, pollution, malnutrition and illness.
•Food. There are 821 million people facing chronic food deprivation in the world.38
•Water. The growth in water usage is outpacing supply, and agricultural run-off and
urban discharge are polluting the rivers. Within the next 25 years, two-thirds of
humanity may live in countries that are running short of water. Only 2,5 per cent of
the earth’s water is freshwater, and only a fraction of that is accessible, despite the
fact that each person needs 50 litres per day for drinking, cooking, bathing and other
needs. At present, slightly more than one billion people lack access to clean drinking
water and 2,6 billion people lack adequate sanitation.39
•Energy and climate. The demand for energy is growing worldwide, but 1.1 billion
people have no access to electricity and nearly 2.8 billion lack access to clean
cooking.40 Most of South Africa’s power is provided by Eskom, whose production
capacity is currently extremely strained. In general, the world is overly dependent
on fossil fuels, such as oil and coal, that result in heavy air pollution. Air pollution
promotes global warming and climate disruptions. The realisation that people need
a safe, clean, affordable, diverse supply of energy has led to billions being invested in
energy research and development.
•More than 27 000 of all species are threatened with extinction.41 Many vanishing
species provide humans with both food and medicine. Some of the traditional fish
stocks found in abundance on the South African coast are now on the brink of
extinction.
The physical environment influences business simply because it is the environment
from which business obtains its physical resources. It is also the environment into
which business discharges its waste. The following interfaces with the physical
environment present opportunities as well as threats to a business:
•The cost of energy. Fluctuations in oil prices directly affect the business
organisation’s environment and dramatically affect the political, economic and
international landscape. As a consequence, this presents threats to, and
opportunities for, business. The increasing cost of energy has launched the most
widespread drive for technological innovation the energy sector has ever seen and
has led to alternative energy sources now being considered. Research on solar
power, wind power and nuclear power has been intensified, and offers many
opportunities to entrepreneurs.
•The growing cost of pollution. Pollution costs the community a great deal in
terms of destroyed living space, as well as expenses related to the prevention and
remedying of pollution. Complying with laws designed to minimise pollution can
also be expensive. Here opportunities present themselves – for example, in the form
of new methods of producing and packaging products to keep pollution to a
minimum. Another opportunity lies in the recycling of products and the
development of alternative energy sources from household trash. Some of the more
modern types of alternative energy generation come from landfills where methane
is generated and harvested to be used, for instance, in heating plants. Basic
household waste of biological origin such as vegetables and fruit can be used as
biodegradable waste, which can also be utilised in the development of alternative
energy sources.
•Environmentalism. Many opportunities for entrepreneurs exist in the fields of
conservation and ecotourism.
•Scarce resources. A broad range of resources that are becoming increasingly
scarce (for example, declining oil reserves) is a matter of concern for entrepreneurs.
Shortages affect the supply of products and can cause severe price rises. However,
shortages also create opportunities, since they often necessitate different methods
of production or substitute products, as occurred with the development of solar
power.
Businesses should respond to the vulnerability of the physical environment by taking
timeous steps to limit any harmful effects on the community. If managers do not show
clear signs of a sense of social and environmental responsibility, they should not be
surprised if hostile relations develop that may threaten the survival of the business.
Various industries have taken steps to limit their damage on the physical
environment. For example, the soap industry is carrying out research on less harmful
chemicals, the fast-food industry is developing containers to reduce litter and the motor
industry is being compelled by legislation to design emission systems to minimise
pollution.
Critical thinking
How should concern of the physical environment influence management decision-making in
South Africa?
4.6.6The institutional–governmental environment
Management decisions are continually affected by the course of politics, especially the
political pressures exerted by the ruling administration and its institutions. As a
component of the macro-environment, the government affects the business
environment and business enterprises in a regulating capacity (as explained in Chapter
1). The government intervenes in the macro-environment on a large scale and
influences it by means of legislation, the annual budget, taxation, import control (or a
lack of it), the promotion of exports, import tariffs to protect certain industries against
excessive foreign competition, price controls for certain products and services, health
regulations, incentives to encourage development in a specific direction, and so on. The
National Development Plan (NDP) is a South African government policy document
designed to eliminate poverty and to reduce the high levels of inequality in South Africa
by 2030. Among other things, this plan points out the key constraints on faster growth
and how to address the country’s socio-economic imbalances.
Furthermore, the government influences the market through government
expenditure. Whenever the government acts as a producer or supplier of services, as in
the case of numerous businesses (for example, Eskom, the Post Office or SAA), it
competes with private enterprise for labour, materials and capital. To an increasing
extent, it is the task of management to study the numerous and often complex activities
of government, as well as legislation and political developments, to determine their
influence on the profitable survival of the business.
The current political dispensation in South Africa, with its form and philosophy of
government, has resulted in power bases, with far-reaching consequences for the South
African business environment. The labour laws and the Employment Equity Act (No. 55
of 1998) and subsequent amendments are examples of how the government influences
the management of businesses. A further issue that is impacting on business, and South
Africa in general, is the proposed scrapping or amending of section 25 of the
Constitution dealing with property rights. This scrapping will allow for the
expropriation of land without compensation in certain clearly defined circumstances.
Section 25 is a pillar for the economic security of both citizens and businesses and is
seen as a basic fundamental human right that is protected in terms of international
human rights instruments such as the United Nations Universal Declaration of Human
Rights, the European Convention on Human Rights and the African Convention on
Human Rights (African Charter on Human and Peoples’ Rights).42
One of the most critical tasks facing businesses is to retain well-qualified, skilled
employees in order to carry out the Employment Equity Act (EEA) (No. 55 of 1998). A
major development in the institutional environment was the release of the Companies
Act (No. 71 of 2008). This bill replaces the Companies Act (No. 61 of 1973) and amends
the Close Corporations Act (No. 69 of 1984). The implications of this act are discussed in
more detail in Chapters 3 and 4.
4.6.7The international environment
While each of the factors discussed so far exerts, to a greater or lesser extent, an
influence on the business environment, the situation is rendered even more complex,
with even more opportunities and threats, if an international dimension is added.
Businesses that operate internationally find themselves in a far more complex global
business environment because every country has its own peculiar environmental
factors, technology, economy, culture, laws, politics, markets and competitiveness, and
each is different from those of every other country. In the international environment,
South Africa is also a player that punches above its weight. It is part of the BRICS
countries which promote commercial, political and cultural co-operation between the
nations of Brazil, Russia, India, China and South Africa. BRICS was established in 2011.
Among other things, it launched its own development bank, the New Development Bank
(NDB) in 2015 to assist with lending money to these five countries for economic growth.
International and multinational organisations are susceptible to all kinds of
international currents and trends. For example, De Beers is vulnerable to changes in the
market environment of the countries in which it mines and sells diamonds. The De
Beers case study showed how the organisation is exposed to price pressures and
increased competition.
The new economic order taking shape worldwide is indicative of the increasing
globalisation of the world economy. Globalisation and the trend towards a borderless
world continually affect businesses in new ways. However, globalisation does not only
present opportunities – it also poses threats as manifested in current international
issues such as Brexit and problems between EU countries about running deficits on
their domestic budgets. Management must therefore constantly assess possible global
threats to its markets and products.
4.7Opportunities and threats in the market
environment and the macroenvironment
The changes brought about in the market environment by the respective variables and
their interactions, as well as the trends that constantly develop in the macroenvironment, may be classified into two groups:
•Changes that offer an opportunity; and
•Changes that pose a threat.
An environmental opportunity may be defined as a favourable condition or trend in
the market environment that can be exploited to the business’s advantage by a
deliberate management effort. However, it should be clearly understood that the
possibilities inherent in an opportunity always have to be assessed against the
background of the organisation’s resources and capabilities (the strengths and
weaknesses in the microenvironment). Without the necessary capabilities and
resources, an opportunity cannot be properly exploited. The success of a business in
making good use of an opportunity therefore depends on its ability to satisfy the
requirements for success in that particular market.
In contrast to an environmental opportunity, an environmental threat may be
defined as an unfavourable condition or trend in the market environment that can, in
the absence of a deliberate effort by management, lead to the failure of the business, its
products or its services. In view of the constant changes in the market environment, it is
the task of management to identify such threats, both actual and potential, and to
develop a counter-strategy to meet them.
Knowledge of trends in the environment, along with the identification of those
issues that largely determine a business’s course of development, is also necessary to
make the decisions that will maximise profitability. For this, scanning the environment
is a necessary management task. It enables management to identify threats and
demands from the environment and, wherever possible, to turn these into
opportunities.
4.8Environmental scanning
The degree to which the environment influences the management of a business depends
largely on the type of business, and the goals and objectives of its management.
Moreover, environmental influences differ from one management area to the next, and
even at different levels of management. This means that the importance, scope and
method of environmental scanning – that is, the process of measurement, projection
and evaluation of change regarding the different environmental variables – differ
from one organisation to the next.
The importance of environmental scanning may be summarised as follows:
•The environment is continually changing; therefore, purposeful monitoring is
necessary to keep abreast of change.
•Scanning is necessary to determine which factors and patterns in the environment
pose threats to the present strategy of a business.
•Scanning is also necessary to determine which factors in the environment present
opportunities for a business to attain its goals and objectives more effectively.
•Businesses that systematically scan the environment are more successful than
those that do not.
•In the 50 years between 1920 and 1970, almost half of the 100 largest
organisations in the United States failed because they did not scan the environment
adequately and adapt themselves to change accordingly.
The extent of environmental scanning is determined by the following factors:
•The basic relationship between a business and its environment;
•The nature of the environment within which a business operates, and the demands
made by the environment on a business (the more unstable the environment and the
more sensitive the business is to change, the more comprehensive the scanning has
to be; increasing instability usually means greater risk); and
•The source and extent of change (the impact of change is rarely so
compartmentalised that it affects only one or two areas of an organisation; change
has an interactive and dynamic effect on several aspects of a business).
The best method of environmental scanning is a much-debated subject. It will largely be
determined by the importance the business attaches to the environment and by the
amount of scanning required. The following are a few guidelines that may be followed:
•The most elementary form of scanning is to update relevant secondary
or published information obtainable from a wealth of sources such as the media, the
organisation’s own data, professional publications, financial journals, statistics,
associates in other organisations, banks, research institutions, records in the
organisation’s own filing system and employees.
•The more advanced form of scanning is the addition of primary information or
special investigations on particular aspects of the environment. Such investigations
can be carried out by members of the organisation’s own staff or by outside
consultants.
•Scanning at a much more advanced level could mean the establishment of a
scanning unit within the business. The unit should have its own staff, who monitor a
broad range of environmental variables and make forecasts about some of these
(such as technological predictions by industrial analysts, and economic predictions
and market assessments by economists using a number of models). Such a scanning
unit is usually located in management’s planning department. The question that
then arises is how all the collected information can be brought to the attention of the
relevant manager. There are many different opinions about this, the most common
being that information about the environment forms the foundation of strategic
planning since it influences the types of strategies likely to be successful.
4.9Summary
A business and the environment in which it operates, including the community that it
serves, depend on each other for survival. Together they form a complex dynamic
business environment where change in the environmental variables continually
determines the success or failure of a business. Because these variables are often
beyond the control of management, it is management’s task to adapt the organisation to
change in the environment. At times, management acts proactively by anticipating
events, thereby also accelerating change. Knowledge of a changing environment by
means of sustained environmental scanning is a prerequisite for taking advantage of
opportunities and averting threats.
Small business perspective
How to get the public and private sector involved in improving entrepreneurship and
growth in the small business sector
South Africa followed a worldwide trend when it introduced a small business ministry to
further the development of small businesses in South Africa. It is expected that this ministry
will be instrumental in enabling entrepreneurship in South Africa (see also Chapter 2, where
entrepreneurship is discussed in more detail). There are serious flaws in the assistance that
small businesses currently get from all forms of government, which forms part of the
institutional environment of the businesses. Some of the problems relate to the low rate of
total early-stage entrepreneurial activity, the high failure rate of newly formed enterprises,
labour laws and regulations that are not conducive to job creation and, in general, low levels
of business confidence preventing new business formation. More specific governmentrelated problems include the poor performance of development finance institutions such as
the Small Enterprise Finance Agency and the National Empowerment Fund. In the private
sector, the big commercial banks are hesitant to lend to high-risk small businesses without
surety. The private sector is also contributing. The De Beers group launched a business
incubator at its Venetia mine to assist entrepreneurs and enterprises in mining communities.
Training covers subjects such as market research, financial management and operational
management which eventually results in the development of a viable business plan. This
business incubator idea has been rolled out at De Beers mines in South Africa. Furthermore,
De Beers is in partnership with Stanford Graduate School in the USA to empower
entrepreneurs and owners in Botswana and Namibia.43
The National Development Plan (NDP) of South Africa, which must extract the South
African economy from its present doldrums, makes provision for about 90 per cent of the 11
million new jobs needed by 2030 to come from the development of small and medium
businesses. It is up to public–private partnerships to assist small business to flourish and to
defuse the ticking time bomb of unemployment in South Africa. Serious doubts are
expressed as to whether South African SMEs are really the growth engine anticipated by the
NDP (see Chapter 3 about the underperformance of South African SMEs).
Source: Compiled from information in Chance, T. 2014. On my mind: switch on to small business.
Available at http://www.financialmail.co.za/opinion/onmymind/2014/10/09/on-my-mind-switch-on-to-smallbusiness. [Accessed 7 April 2015].
KEY TERMS
business
international environment
business environment
macro-environment
business functions
market environment
competitive forces
mega-trends
competitors
micro-environment
consumer market
mission
consumerism
mission statement
corporate social responsibility
monetary policy
demographic change
opportunity
economic environment
organisational capabilities
environmental change
physical environment
environmental opportunity
purchasing power
environmental scanning
resources
environmental threat
social environment
environmental variables
suppliers
environmentalism
tangible resources
ethics technological environment
task environment
gross domestic product (GDP)
technological environment
inflation
threat
institutional environment
urbanisation
intangible resources
vision
intermediaries
vision statement
Questions for discussion
Reread the De Beers case study on page 123 and answer the following questions:
1. a.What were the most dramatic changes in the external environment that
forced De Beers to reconsider its business model?
b.Can you think of any other changes in South Africa that might influence De
Beers’ strategic decision regarding investments in the country?
2.Which market variables would influence the further development of the Venetia
Mine near Musina?
3.Perform a SWOT analysis on De Beers.
4.Do you think De Beers still wields some bargaining power in the supply chain as a
supplier of diamonds, seeing that its diamond market share has decreased steadily
over the years? Motivate your answer.
5.Describe the current competitive situation in the global diamond industry. Refer
to Porter’s five competitive forces and their impact on the global diamond industry.
6.Using the De Beers example, explain the main differences between an
opportunity and a threat in this industry.
Multiple-choice questions
1.South Africa has been negatively affected by the instability in the European Union
(e.g. UK (Brexit), Greece, Portugal, Spain and Italy). Businesses, industries and the
South African economy as a whole were affected by this. This is an example of a
situation in the __________ business environment, which forms part of the __________
environment, over which managers in an organisation have __________ control.
a.national, macro, total
b.global, macro, no
c.global, macro, some
d.global, market, no
2.Which of the following statements about environmental scanning is correct?
a.Environmental scanning is necessary to keep abreast of change, to determine
which factors pose threats to stated objectives, and to determine which factors
represent opportunities to the business.
b.Environmental scanning is necessary to keep abreast of change, and to
determine which factors represent opportunities to promote current objectives,
keeping in mind that businesses that systematically scan the environment are
usually unsuccessful.
c.Environmental scanning is necessary to impede change, to counteract threats
to existing goals, and to determine which factors represent opportunities to
promote current goals.
d.Environmental scanning is unnecessary as it is not necessary to keep abreast
of change, to determine which factors pose threats to existing goals, or to
determine which factors represent opportunities to the business.
3.Which of the following is not one of the five factors determining the nature and
intensity of competition in a particular industry?
a.The possibility of new entrants (or departures).
b.The bargaining power of clients and consumers.
c.The lack of technological innovation.
d.The availability or non-availability of substitute products or services.
e.The number of existing competitors.
4.Food, energy and climate, biodiversity and the growing cost of pollution are
issues of concern in the _______ environment.
a.technological
b.social
c.physical
d.economic
5.In a developing economy, managers should continually assess technology trends
that revolve around the following:
i.mineral technology
ii.medical technology
iii.transport technology
iv.power technology
a.i
b.i,ii
c.
d.i,ii,iii,iv
References
1.Friedman, T.L. 2006. The world is flat: The globalised world in the twenty-first century.
London: Penguin.
2.Ibid.
3.Central Intelligence Agency. 2009. South Africa. The World Fact Book. Available
at https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html.
[Accessed 1 December 2009].
4.Statistics South Africa. 2018. Economic Growth Archives. Available
at http://www.statssa.gov.za/?cat=30 [Accessed 28 February 2019].
5.Boomgard, M. & Farley, K. 2014. SA on the brink. Available
at http://www.iol.co.za/business/news/sa-on-the-brink-1.1791903. [Accessed 5
March 2015]; African Economic Outlook. 2012. South Africa. Updated 27 May 2012.
Available at http://www.africaneconomicoutlook.org/en/countries/southernafrica/south-africa/. [Accessed 6 June 2012].
6.Lazenby, K. 2018. The strategic management process: A South African perspective.
Second edition. Pretoria: Van Schaik, p. 274.
7.Reproduced by permission of Oxford University Press Southern Africa (Pty) Ltd.
From Oxford South African Pocket Dictionary. 4th edition © Oxford University Press
Southern Africa (Pty) Ltd 2015.
8.Cohen, T. 2014. Editor’s note: Devil take the hindmost. Available
at http://www.flnancialmail.co.za/opinion/editorsnote/2014/11/27/editor-s-notedevil-take-the-hindmost [Accessed 5 March 2015].
9.Van Wyk, R.J. 1985. Environmental change and the task of the human resource
manager in SA. Journal of Business Management, 16(2): 72.
10.Brevis, T. & Vrba, M. (Eds). 2014. Contemporary management principles. Cape Town:
Juta, pp. 74–75.
11.Jamasmie, C. 2017. De Beers step up efforts to remove “conflict diamonds” from the
market. Available at http://www.mining.com/de-beers-steps-efforts-remove-conflictdiamonds-market/. [Accessed 29 November 2018].
12.Hodge, B.J. & Anthony, W.P. 1984. Organization theory. Boston: Allyn & Bacon,
Chapter 3.
13.Meredith, E.D., Forest, R.D. & David, F.R. 2014. Mission statements, theory and
practice: A content analysis and new direction. International Journal of Business,
Marketing, and Decision Sciences, 7(1): 95–110.
14.Post Office South Africa, n d. Vision and mission. Available
at https://www.postoffice.co.za/about/missionvision.html [Accessed 13 December
2018].
15.DHL. n.d. Our vision and mission. Available
at http://www.dhl.com/en/about_us/company_portrait/mission_and_vision.html [Acc
essed 13 December 2018].
16.Womack, J.P, Jones, D.T. & Roos D. 1990. Machine that Changed the World.
Massachusetts Institute of Technology. Rawson Associates Scribner. Simon & Schuster,
p.29.
17.Eskom. n.d. What is load shedding? Available
at http://www.eskom.co.za/live/content.php?Item_ID55608. [Accessed 1 December
2009]. [AQ 404 error]
18.Pressly, D. 2015. State of affairs at Eskom worries Brown. Available
at http://www.fin24.com/Economy/State-of-affairs-at-Eskom-worries-Brown20150312. [Accessed 17 March 2015].
19.Mohr, P.J., Fourie, L.J. & Associates. 2009. Economics for South African students.
Fourth edition. Pretoria: Van Schaik, p. 57.
20.Van den Heever, J. 2006. A good story to tell. Finweek, Survey, 21 September, p. 10.
21.Maswanganyi, N. 2014. Marcus not in favour of higher inflation target band.
Available at http://www.bdlive.co.za/economy/2014/10/30/marcus-not-in-favourof-higher-inflation-target-band. [Accessed 17 March 2015].
22.Avert. 2018. HIV and Aids in South Africa. Available
at https://www.avert.org/professionals/hiv-around-world/sub-saharan-africa/southafrica#Antiretroviral%20treatment%20(ART)%20availability%20in%20South%20Af
rica [Accessed 28 February 2019].
23.Statistics South Africa. Mid-year population estimates. 2018. Available
at http://www.statssa.gov.za/?p=11341 [Accessed 28 February 2019].
24.Adapted from Bizcommunity. 2015. Demographics and their role in consumer
behaviour. Available
at http://www.bizcommunity.com/Article/196/168/125535.html#topstory.
[Accessed 11 March 2015]. Reprinted by permission of Bizcommunity.com.
25.United Nations. 2018. Population Division. World Urbanization Prospects. Available
at https://population.un.org/wup/Download/ [Accessed 28 February 2019]; United
Nations. Department of Economic and Social Affairs. n.d. News. Available
at https://www.un.org/development/desa/en/news/population/2018-revision-ofworld-urbanization-prospects.html [Accessed 28 February 2019].
26.Ntuli, P. 2015. The use of UHT milk. Available
at http://www.bizcommunity.com/Article/196/168/125535.html#topstory.
[Accessed 11 March 2015]; Persistence Market Research. 2015. South Africa UHT milk
market will reach US$ 1185,3 million in 2019. Available
at https://www.persistencemarketresearch.com/mediarelease/south-africa-uht-milkmarket.asp.
27.Statistics South Africa. n.d. Education: A roadmap out of poverty? Available
at http://beta2.statssa.gov.za/?p=2566. [Accessed 20 March 2015].
28.Mbude, P. 2018. 85% of South African learners aspire to go to university – where
will they end up? Available at https://www.w24.co.za/Wellness/Mind/85-of-southafrican-learners-aspire-to-go-onto-university-where-will-they-end-up20181123 [Accessed 26 November 2018].
29.Grant Thornton. n.d. Percentage of women in senior roles in SA creeps up. Available
at https://www.grantthornton.co.za/Newsroom/wib-ibr-2018/ [Accessed 20
November 2018].
30.Werther, W.B. Jr. & Chandler, D. 2006. Strategic corporate social responsibility:
Stakeholders in a global environment. Thousand Oaks, CA: Sage.
31.Ibid., p. 7.
32.Ibid.
33.Ibid.
34.The Times. 2009. Public input adds value to King III. Available
at http://www.timeslive.co.za/thetimes/article68897.ece. [Accessed 1 December
2009].
35.HIV and Aids in South Africa. 2018. Available
at https://www.avert.org/professionals/hiv-around-world/sub-saharan-africa/southafrica [Accessed 20 November 2018]; Times Live. 2012. SA has lost 4.4m people to
HIV/AIDS: Survey. Available
at http://www.timeslive.co.za/specialreports/hivaids/2012/01/24/sa-has-lost-4.4mto-aids-survey. [Accessed 19 June 2012].
36.UN World Population Prospects 2017. Available
at https://population.un.org/wpp/Download/Standard/Population/.
37.Adapted from Strydom, J.W. in Cant, M.C. & Machado, R. 2005. Marketing success
stories. Sixth edition. Cape Town: Oxford University Press, pp. 20–22.
38.FAO. United Nations. 2018. The state of food security and nutrition in the world.
Available at http://www.fao.org/state-of-food-security-nutrition/en/.
39.World Water Council. 2018. Water supply and sanitation. Available
at http://www.worldwatercouncil.org/en/water-supply-sanitation. [Accessed 25
March 2018].
40.International Energy Agency. 2018. Access to electricity. Available
at https://www.iea.org/energyaccess/database/. [Accessed 25 March 2018].
41.The IUCN red list of threatened species. 2018. Available
at https://www.iucnredlist.org/. [Accessed 25 March 2018].
42.Crosby, A. 2017. Golegal. Industry News and Insight. Available
at https://www.golegal.co.za/expropriation-without-compensation/ [Accessed 22
November 2018].
43.Jackson, T. SA’s De Beers mine launches business incubator. Available
at http://disrupt-africa.com/2017/10/sas-de-beers-mine-launches-businessincubator/ [Accessed 29 November 2018].
CHAPTER 5
Corporate social responsibility
Mari Jansen van Rensburg
The purpose of this chapter
Businesses operate within societies and countries. The impact (good or bad) of their
presence and operations on communities and the environment is huge. They exert
tremendous financial power and influence upon all sectors of society. Businesses have the
power to influence policy, and lobby both government and civil society to further their own,
sometimes selfish, interests, maximising profit for their shareholders. They can do so to the
detriment of society and the environment. Business also has the power to transform society
for the better by acting responsibly in its pursuit of profit. This chapter will explore the role of
business as an agent of change for the common good. It will do so by defining and exploring
the following interrelated concepts: corporate social responsibility, corporate governance,
sustainable development and stakeholder engagement.
Learning outcomes
On completion of this chapter you should be able to:
•explain and define what corporate social responsibility (CSR) is
•explain why a company would consider implementing CSR programmes
•define corporate governance
•explain corporate governance compliance requirements
•define the concept sustainable development
•explain who the stakeholders of a company are
•give reasons why a company should engage with its stakeholders
•describe how a company would go about engaging with its stakeholders
•describe the contribution of CSR to sustainable development.
5.1Introduction
The development and implementation of corporate social responsibility (CSR)
frameworks, policies and practices in companies is an ongoing process. It calls for vision
and commitment from the leadership and management of the company – in other
words, the board of directors and the senior management team.
CSR has become the latest catchword in business, and most corporates accept that
they have a role to play to lessen the burden placed on governments to provide
comprehensive social services. However, the commitment and attitudes of corporate
leaders differ from those who consider CSR as a distraction from profit maximisation
to those who argue that businesses derive enormous benefits from participating in
social transformation. For some companies, it is only about compliance compared to
other leaders who display true commitment and show impact towards developing their
societies. Investec is a shining example of how corporate social responsibility can be
entrenched in the core business of an organisation, driving both profits and
development.
CASE STUDY: Investec: A responsible corporate citizen
Investec is an international specialist bank and asset manager that provides a diverse range
of financial products and services. The company was founded as a leasing company in
Johannesburg in 1974 and expanded to serve a select client base in three principle markets,
the UK and Europe, South Africa and Asia/Australia. Today the company has a dual listing in
London and Johannesburg and is a FTSE 250 company (the FTSE 250 is an index
composed of the 101st to the 350th largest companies listed on the London Stock Exchange
in terms of market capitalisation). In the almost 40 years of its existence, the company has
grown its capital from less than £1 million to the existing £5.4 billion. From the onset, the
founders of the company were committed to building a sustainable business, one that has
been able to survive and thrive through all conditions, growing earning from £0,16 million in
1981 to £491 million at the end of the 2018 financial year. This business is conscious, not
only of their duty to clients and shareholders, but also to employees and the broader
community they serve. Investec has a deeply-rooted tradition of active corporate citizenship
which has been widely recognised internationally.
Investec’s corporate responsibility philosophy is closely guided by their organisational
purpose, which is to create sustained long-term wealth. At the heart of their corporate
responsibility is a caring approach to their people. The company provides staff with a safe,
healthy and stimulating work environment to ensure that they are motivated and equipped to
deliver exceptional customer service. Their approach towards corporate social investment is
to provide their beneficiaries with a ‘hand up’ instead of ‘hand-out’. As such, they have a
focused approach that seeks to make a difference through entrepreneurship and education.
The aim of CSI projects is to promote lifelong skills development that can contribute towards
building and growing economies of countries in which they operate. In South Africa, the
company has contributed towards transformation through several projects, amongst them
the Youth Employment Service (YES) programme. This programme, launched in March
2018, aims to find employment for approximately 1200 youth annually. The company also
recognises the challenges that climate change presents to the global economy and thus
supports activities that either reduce the impact on or prolongs the life of our planet.
Investec’s commitment towards social responsibility, as well as the achievement and
recognition of their efforts, are summarised in the figure on the next page:
We care about our
PEOPLE
We care about our COMMUNITIES
We care about our
ENVIRONMENT
Attracting and developing a
strong, diverse and capable
workforce.
Unselfishly contributing to our communities through
education and entrepreneurship.
Having a positive enviro
impact through our oper
business activities.
1,9% spend on learning and
development as a % of staff
costs for Investec plc (2018)
1,2% spend as a % of operating profit for Investec plc
(2018)
6,1% reduction in carbo
for Investec plc (2018)
Recognition and
Achievements - 2018
Financial Year
•Voted second most
attractive employer by
professionals and fourth
by students in South
Africa in the 2017
Universum awards.
•Investec CEO, Stephen
Koseff won the Lifetime
Achievement Award
presented by the 2018
Recognition and Achievements - 2018 Financial Year
•Winner of the following Business Charity Awards:
»Community Impact 2017
»Business of the Year 2017
•Winner of the National CSR Award for Best
Community (Legacy) Project 2017
•Winner of the Bromley by Bow partner of the year
award
•The South Africa flagship programme, Promaths
contributed to 4,8% and 5,0% respectively of the
country’s total mathematics and science distinctions
respectively in the 2017 academic year. Since
inception of the programme 12 years ago, Investec
Recognition and Achie
2018 Financial Year
•Trained 195 frontlin
consultants on envir
social and governan
practices in South A
the UK
•88% of energy lend
relates to clean ene
•12000 children rea
through the Coachin
Conservation progra
2013
African Banker Awards.
has funded over 7 000 previously disadvantaged
learners with 84% either having completed, or are in
the process of completing, tertiary education.
•Voted South Africa’s eighth most valuable brand
•Winner of the Financial Innovation Awards 2017 Innovation in Sustainability or Social Responsibility
Award for The Success programme run in partnership
with Arrival Education
•Investec Rhino Life
supported the rescu
rhino since 2012
•R2,5 million spend
initiatives to ensure
continuation of busi
Cape Town office d
2017/18 drought
•The 2 Gresham Str
won the Chairman’s
Corporation of Lond
City Awards Schem
•The Energy Manag
System that covers
the UK, Ireland and
Islands was certified
•The 2 Gresham Str
Environmental Man
System is certified t
14001.
•The coordinator of
Coaching for Conse
programmes at Goo
Foundation won a s
Eco-logic Award in t
‘Eco-Youth’
Inclusion in world-leading indices (Indices that objectively measure the performance of companies that meet global-rec
standards)
Index
2018
Performance
Notes
Carbon Disclosure Project
B
Investec is a member and Investec Asset Management is a sign
investor
Code for Responsible Investing in
South Africa
Signatory
Dow Jones Sustainability
Investment Index (DJSI)
Score out of 100
73
ECPI Index
Constituent
FTSE4Good Index
Included
FTSE/JSE Responsible
Investment Index Series
Constituent
MSCI Global Sustainability Index
Series - Intangible value
assessment rating
AAA
STOXX Global ESG Leaders
Indices
Member
Investec Limited ranked as one of four industry leaders on the D
Emerging Markets Index; Investec plc ranked as one of 15 indus
on the DJSI World and one of nine in the DJSI Europe indices.
United Nations Global Compact
Participant
United Nations Principles for
Responsible Investment
Signatory
Investec’s business strategies and decisions are driven by their values and the intention to
live in society, and not off it. Clients of this company know that they deal with a sustainable,
financially resilient business, which is here for the long term.
Source: Investec. 2018. Annual Report 2018. Available at https://www.investec.com/content/dam/investorrelations/financial-information/group-financial-results/2018/FINAL-Investec-DLC-Vol%201-15-June2018.pdf [Accessed 10 November 2018].
5.2Introducing corporate social responsibility
5.2.1What is corporate social responsibility?
Investec publicly declare that making a meaningful contribution to the world in which
they operate and live in is at the heart of their values. Their philosophy towards being a
responsible corporate citizen is underpinned by making an unselfish contribution to
society, nurturing an entrepreneurial spirit, embracing diversity and respecting others.
‘I have a basic belief in tomorrow. In the country that is ours. In the power of
possibility. Investec provides a platform to really make a difference.’ Fani Titi, Investec
Group Co-CEO.1
There has been increased pressure on business leaders to take a stand on social
issues and environmental issues. Today, consumers expect to hear what CEOs
and companies think about issues that affect all of society including inequality,
globalised trade, social tensions, climate change, population growth, ecological
overshoot, geopolitical tensions, radical transparency and rapid technological and
scientific advancement.2 Corporate CEOs have the clout and credibility to lead the action
and change required to safeguard our planet and address socio-economic issues on
which governments lag.3 In 2017, the world’s 500 largest companies generated $30
trillion in revenues, $1,9 trillion in profits and employed 67,7 million people worldwide.
Walmart was ranked first in terms of annual revenue on the 2018 Fortune Global 500
list. This company employed 2 300 000 people and recorded revenue of $500,3
billion.4 To put this in perspective, Walmart’s revenue is in excess of the government
revenue of major global economies including Australia, South Korea and India. The
company’s revenue was more than five times that of the $92,38 billion earned by South
Africa in 2017.5
The reality is that corporations exert tremendous power upon the world. The
financial wealth and economic clout of such major players allow them to use their
power and influence to contribute to the common good of markets. They can do so
through partnerships with government, business, communities or by themselves,
providing equitable and safe job opportunities, investing in small and medium
enterprises (SMMEs) through their supply chains, and building infrastructure, as
Investec does. Industry can even develop new technologies for energy efficiency or
products to provide the poor with access to markets. Corporations can also lessen their
impact on societies and the environment, or even contribute to social development.
Many companies live up to society’s expectations to become part of the solution.
Vodacom has, for example, committed to social transformation in response to the call by
the South African government for wider economic inclusion as illustrated in the box that
follows.
CASE STUDY: Vodacom6
In response to the high levels of inequality, unemployment and poverty in South Africa,
Vodacom has pledged its commitment to further broaden access to digital services. As such,
the company includes a clear commitment to removing barriers to digital access, and to
deliver the significant societal benefits associated with improved connectivity in their Vision
2020. Vodacom furthermore pledged to play ‘a transformative role in the provision of
financial services, education, healthcare and agriculture, and to demonstrate leadership in
promoting Broad-Based Black Economic Empowerment (B-BBEE) in South Africa’. Their
existing initiatives to accelerate socio-economic transformation include:
•Substantial investment in extending networks into rural areas across markets;
•Promoting commercially viable mobile agricultural solutions through their Connected
Farmer platform, and delivering measurable education and health benefits through
mobile data initiatives;
•The Siyakha platform offers a zero-rated health, education and career portal for lowincome consumers in South Africa;
•Investments in enterprise development, preferential procurement, skills development
and employee diversity; and
•A retail transformation strategy that encourages greater ‘black’ ownership of their
franchise channel.
However, such power could also be exploited and result in real harm to human health,
human society, political governance and the natural environment. The challenge for
major corporations with global clout is to recognise and act on the mutual
interdependence between nations, societies and firms. Corporate social
responsibility (CSR) deals with how business organisations can meet essential needs
without dishonouring community values.
Definitions of CSR vary by, amongst other things, the different practical orientations
of corporations towards their responsibilities. Different companies also give varying
emphasis to different aspects of CSR (for example, community involvement, socially
responsible products and processes, and socially responsible employee relations) to
realise their business objectives. The general consensus is that CSR is an umbrella
concept that recognises the following points:
•Companies have a responsibility for their impact on society and the natural
environment. This responsibility may extend beyond legal compliance and the
liability of individuals.
•Companies have a responsibility for the behaviour of others with whom they do
business (for example, within supply chains).
•Companies need to manage their relationship with wider society, whether for
reasons of commercial viability or to add value to society.
The King III Report7 provides a broader definition of the responsibilities of corporations
(not limiting the scope to the social aspect only): ‘Corporate responsibility is the
responsibility of the company for the impacts of its decisions and activities on society
and the environment, through transparent and ethical behaviour that:
•contributes to sustainable development, including health and the welfare of society;
•takes into account the legitimate interests and expectations of stakeholders;
•is in compliance with applicable law and consistent with international norms of
behaviour; and
•is integrated throughout the company and practiced in its relationships.’
5.2.1.1Corporate citizenship and corporate social investment
Some literature uses the terms ‘corporate citizenship’, ‘corporate social investment’ and
‘corporate social responsibility’ interchangeably. Although corporate social
responsibility and corporate citizenship both refer to business’s conduct in society, the
former focuses solely on the responsibility aspect of business while the latter focuses on
business being a social player by virtue of both its rights and its responsibilities as a
citizen. Some explanation of why the term ‘corporate social responsibility’ is preferred
above the term ‘corporate citizenship’ in this book is given below. Note that corporate
social investment refers only to one very specific aspect of corporate social
responsibility.
The term ‘corporate citizenship’ ‘is the recognition that the organisation is an
integral part of the broader society in which it operates, affording the organisation
standing as a juristic person in the society with the rights but also the responsibilities
and obligations. It is also the recognition that the broader society is the licensor of the
organisation.’8 Corporate personhood means that corporates are granted constitutions
rights. These rights and responsibilities include the right to govern internal affairs, the
right to enter into contracts, the right to hold assets, the right to hire, and the right to
sue and be sued.
Corporate social responsibility, with its focus on the responsibilities of corporations,
is therefore a preferred term to corporate citizenship.
Critical thinking
Pioneer Foods: Nourishing the lives of South African children.
Pioneer Foods is one of South Africa’s largest producers and distributors of branded food
and beverage products. As part of their commitment to their community, the company
established the ‘School Breakfast Nutrition Programme’. This programme ensures that more
than 26 000 learners from disadvantaged communities across South Africa have at least one
nutritious meal per day. The impact of this programme is widely recognised and has had a
positive impact on school attendance, learner performance and health.9
Do you think that Pioneer Foods benefits from this initiative, or should this be considered
an unrecoupable expense?
It is clear that Pioneer Foods takes responsibility for giving back to the community
beyond what is legally expected. The ‘School Breakfast Nutrition Programme’ initiative also
signals the company’s commitment to the communities it serves by offering at least one
nutritious meal to those who cannot afford it.
While companies may donate substantial amounts of money to worthy causes and
community-based projects, CSI does not refer to a company’s contribution to society through
its core business activities for example, the creation of employment and training
opportunities or local business development. Neither does it refer to a company’s
contribution through its engagement in public policy. Over the past 20 years, South African
companies have contributed an estimated R137 billion to social development. The estimated
CSI expendidure in 2017 was R9,1 billion.10 Gone are the days where the social
responsibility of business was to increase its profits; instead it is now expected that
organisations operate in the triple context of the economy, society and the environment.
5.2.2Cannibals with forks: The triple bottom line
Best-selling author and green guru John Elkington published a book entitled Cannibals
with forks: The triple bottom line of 21st century business in 1998.11 The title was inspired
by poet Stanislaw Lec who asked the question: ‘Is it progress if a cannibal uses a fork?’
Elkington made a compelling argument that businesses could expand their life
expectancy by using sustainability’s ‘three-pronged fork’, or the triple bottom line.
Indeed, he argues that future market success often depends on a business’s ability to
satisfy not just the traditional bottom line of profitability, but that companies are also
required to focus on environmental quality and social justice. In this section, we will
review the triple bottom line, a term coined by Elkington. This is an important concept
as businesses operate in an environment in which the planet, people and profit are
inextricably intertwined. To illustrate this philosophy practically, imagine being asked
to provide investment advice about the following three companies described by their
CEOs as follows:
Company 1: Our company is known for its green approach, meeting rigorous
environmental standards in terms of infrastructure, manufacturing and operations.
Producing environmentally friendly products is more expensive but, given the
international emphasis on environmental sustainability, consumers are willing to pay a
premium when buying these products. I believe that the decline in market share is
temporary and that it will recover along with the country’s economy. I am, however,
concerned about rumours of possible retrenchments and low staff morale. Perhaps if we
cut our advertising budget, we could postpone this.
Company 2: Staff is our priority and we are proud to announce that we won the
Employer of the Year award two years ago. Happy employees are productive employees
and, as such, we provide a child-care facility, a state-of-the-art restaurant and a caring
environment. The past few years have been difficult with the economic crunch. Let’s
face it: consumers tend to cut back on luxury consumer goods. So, perhaps we need to
lower our manufacturing and product standards, but we will never compromise our
commitment to our staff.
Company 3: Being in the mineral sector, we know that we offer a world-class
product at below-industry costs. We are, however, very disappointed with the attitude
of the local community and labour market. One would expect that in a country with such
a high unemployment rate, low-skilled workers would be more appreciative of being
gainfully employed. We have also invested in the community in terms of creating jobs
and supporting local businesses and schools, and we realise that concerns about
pollution are valid. Then again, we will rehabilitate exhaustive mines. We also have
health and safety programmes, so we don’t know what all the fuss is about.
Sadly, the business interests of the above companies clearly indicate that not one is
embracing the triple bottom line sustainably. The idea behind the triple bottom line is
that a company’s ultimate success or health can, and should, be measured against its
financial bottom line as well as its social/ethical and environmental performance. It is
therefore expected, and required, that companies honour their obligations to
stakeholders and behave responsibly.
The fundamental changes to business and society calls for all organisations and
governments to conduct business in a sustainable manner. It is a reality that
organisations and individuals are using natural assets faster than nature is regenerating
them. In addition, continued population growth on the African and Asian continents
creates tension between what humanity needs and what the planet can provide. Society
expects business leaders and governments to become part of the solutions and not to
shy away from commitments to achieve the United Nations Development Goals, the
African 2063 Agenda and the South African National Development Plan 2030.
Companies listed on the Johannesburg Stock Exchange must integrate sustainability
reporting with financial reporting. South Africa is one of the few emerging economy
markets that requires formal sustainability reporting. However, despite clear reporting
guidelines, South African companies and state-owned enterprises dominate the media
when it comes to accounting and business-related scandals; think about the report on
state capture, the Guptas, Steinhoff, KPMG and VBS to list only a few. Some of these
stories read like film scripts. For example, the description on the back cover of the book
‘Steinhoff: Inside SA’s Biggest Corporate Crash’, written by James Brent Styan, reads as
follows:12
On the morning of Tuesday 5 December 2017 the Steinhoff Group was worth R193 billion.
Twenty-four hours later, more than R117 billion of its market value had been wiped out. The
Steinhoff empire, built up over 50 years into an international business giant, had crumbled
overnight.
Markus Jooste, Steinhoff’s flashy CEO, resigned and has since dodged an avalanche of
accusations and scandals involving luxury homes for a blonde mistress, racehorses,
allegations of fraud and a life of extravagance.
What exactly happened? What is Steinhoff, who is Markus Jooste, and how does it all tie in
with the so-called ‘Stellenbosch Mafia’? Where do business tycoon Christo Wiese, Shoprite
and Pepkor fit in, and where is the pensioners’ money?
Source: Reprinted with permission from LAPA Publishers.
Organisations and individuals can no longer escape the consequences of social and
environmental injustices as it becomes almost impossible to conceal secrets. Indeed,
social media and sophisticated analytics are creating a world characterised by radical
transparency. Stakeholder expectations have also changed and the Millennials (those
born since 1980) have shown that they are more concerned with the global
environmental crunch than with the financial crisis. Hence, organisations need to create
value in a sustainable manner, ‘making more but with less’.13
Judge Mervyn King, said: … ‘the duty of care has become both more complex and more
necessary. No governing body today can say it is not aware of the changed world in
which it is directing an organisation. Consequently, a business judgement call that does
not take account of the impacts of an organisation’s business model on the triple context
could lead to a decrease in the organisation’s value.’14
In this context, it should be noted that sustainable organisations and societies
typically generate and live off interest rather than depleting their capital. Capital
includes natural resources (i.e. minerals, water and air), human and social assets (from
worker commitment to community support) as well as economic resources (i.e. legal
and economic infrastructure). In short, the triple bottom line advocates that a
company’s ultimate worth should be measured in financial, social and environmental
terms. These terms should respond to all stakeholders’ legitimate claims.15 As a result,
the triple bottom line (TBL) metaphor has been incorporated across the world to
guide corporate reporting. Key examples include the European Union’s directive on
environmental, social and governance (ESG) reporting, the United Kingdom’s strategic
report, the context of reports filed with the United States Securities and Exchange
Commission, the Operating Financial Review in Australia and the listing requirements of
several stock exchanges, including the JSE.16 These reporting frameworks have changed
traditional focus on financial reporting to include dimensions of social and
environmental performance. The TBL dimensions are also commonly called the three
Ps: people, planet and profit.17 If companies pay lip service to social responsibility –
even Steinhof had an exhaustive code of ethics and principles – the outcome could be
devastating. Conversely, companies embracing the triple context lay a solid foundation
for a sustainable future.
In the context of Africa, the notion that emphasises the interdependence between
organisations and societies is underpinned by the concept of Ubunto or Botho, captured
by the expressions uMuntu ngumantu ngabantu and Motho ke motho ka batho - I am
because you are; you are because we are. These concepts imply that the common
purpose in all human endeavour should be to serve humanity. In line with this ethos,
organisations are also required to take responsibility for their activities and outputs.
These obligations to society are set out in the South African Companies Act. Section 7,
for example, states that the purpose of the act includes ‘to promote compliance with the
Bill of Rights as provided for in the Constitution’ and it ‘reaffirms the concept of the
company as a means of achieving economic and social benefits.’18
5.2.3CSR in contemporary business management
Although reporting frameworks include CSR, the focus should extend beyond
compliance, reporting and publicity. Executives should encourage a culture of corporate
social responsibility and become influencers in advancing social and environmental
challenges. The focus of CSR should also be aligned to current discourse to address
issues that matter to employees, customers and communities. The discourse in 2018
focused on the themes listed below:19
Workplace harassment and inequality: Reading the ‘Whistle blowing essay’ by
Susan Fowler about sexism and harassment during her time at Uber and following the
#MeToo movement it becomes clear that sexual harassment and gender inequality
occur in even the most progressive companies and societies. Various initiates have been
implemented in South Africa to prepare females for senior management and leadership
roles, and the results have been encouraging, showing year-on-year growth. Findings in
the 2018 Grant Thornton International Business Report suggest that 29 per cent of
senior roles in South Africa are filled by women. However, one in five local businesses
still have no women at all in senior positions. These businesses are yet to realise the
advantages of diversity and need to create inclusive cultures in which a wide range of
voices are listened to. Addressing gender inequality should be about behavioural
changes instead of ticking checkboxes.20
Diversity conversations: Although gender inequality is often a leading topic,
diversity considerations should be expanded. Diversity should be extended beyond
gender and race to include different cultures, languages, ages, sexual orientations,
disabilities, backgrounds and experience. A diverse workforce can improve
performance as research has shown that heterogeneity promotes creativity and
heterogeneous groups have been shown to produce better solutions to problems and a
higher level of critical analysis.21 However, embracing diversity requires mutual respect
and understanding beyond mere compliance to equal treatment policies and scorecard
targets.
Corporate activism: Prominent business leaders issue reactive statements on
everything from land reform to state capture. As illustrated in the Vodacom case study,
it is expected that companies will take more focused action by designating social or
policy areas where they can make the most impact or devote resources as part of
proactive initiatives. Brave leaders like Sipho Pityana, for example, openly expressed his
dissatisfaction with the ANC leadership. In an interview aired on eNCA in 2016, Pityana
called for the President to resign – ‘He [Zuma] should resign as the president of the
country and that’s what accountability is all about. It is not possible that they can’t see
that the country is going through the kind of mayhem and mess it’s going through. It is
not possible that they can’t see the ANC is going through what it is going
through’.22 Pityana’s efforts as convenor for the ‘Save SA’ campaign have been noted and
in June 2018 he was elected to lead Business Unity SA.23
From disaster recovery to climate resilience: No company is immune from
climate change and companies are increasingly investing more resources into
preventing, mitigating and adopting an attitude of climate resilience rather than just
planning recovery. In 2018, Cape Town was on the verge of becoming the first major
urban centre to run out of water. Cape Town narrowly averted disaster through drastic
civic water conservation campaigns initiated and supported by local government,
business and communities. Stakeholders worked closely together to reduce water
consumption. Residents had to halve their consumption with suburban restrictions of
50 litres a day per person; local businesses and government invested in desalination
plants, wastewater treatment units and groundwater-extraction projects; and business
had to adapt. Top-tier restaurants served food on paper plates, salons requested clients
to wash their hair prior to appointments, hotels removed bath plugs to encourage
guests to shower rather than bath. These are only some of the reactions. In facing a
future with ecological limits many businesses are rethinking their impact on the
environment and are facing tough decisions over sharing scant resources.24
Higher standards for suppliers: Increasingly, large companies use their power as
customers to drive improvements in responsible business practices through their
supply chains. As a client, corporates hold suppliers accountable for business ethics,
environmental performance and human rights issues. Association with suppliers may
impact on corporate reputations and hence suppliers are evaluated on more than the
services they deliver or products they produce. If suppliers are implicated in, or
associated with unethical conduct it often has a direct impact on their performance.
Consider, for example, the case of KPMG. Following heavy criticism over its work for
South Africa’s controversial Gupta family and the collapsed lender VBS, 20 listed clients
ended their professional relationship with KPMG between 2017 and 2018. South
Africa’s Auditor-General also barred KPMG from government work, citing ‘significant
reputational risks’ from being associated with the firm.25
Prioritising privacy and data protection: Following looming treats of cyberattacks, many reported cases of identity theft and widespread cybercrimes, companies
are required to safeguard clients’ rights to privacy. South Africa has established laws
protecting data privacy (i.e. the Protection of Personal Information Act (No. 4 of 2013))
but there is currently no legislation in effect which compels a business to disclose data
breaches to any authority or to the persons affected. The leaks of personal information
have highlighted the need for organisations to have robust cyber-security systems. As
part of their responsibility to protect clients, corporations should not collect data that is
not relevant. Businesses also need to secure permission to use collected data if it
extends the reason for collection. Companies furthermore need to ensure that any data
collected is highly secured and that only need-to-know personnel have access. Finally,
staff require training on how to avoid phishing scams and malicious software
downloads.26
Today, CSR is transforming from an approach that focused on corporate social
investment in charitable causes and promotional actions to become an integrative
approach that is more strategic and transformative in nature. Business leaders are also
expected to take on a responsibility to create a more sustainable future. Take, for
example, Elon’s Musk’s vision to ‘help expedite the move from a mine-and-burn
hydrocarbon economy toward a solar electric economy’ through Tesla enterprises. This
can only be done if leaders change their way of thinking and doing. Cherished
ideologies, high-impact lifestyles and selfish values need to be replaced by
transformational leadership committed to delivering a social purpose through
business.27
The business rational for CSR varies, however, most CSR programmes are driven by
a combination of reasons.
5.2.3.1Social drivers
No company would wish to have the reputation of being socially irresponsible. It is
desirable for an organisation or an activity to be thought of as socially responsible.
Some consumers prefer socially responsible products and services, and employees
increasingly choose to work for companies with a reputation for being socially
responsible. Mainstream investment funds and stock exchanges are addressing CSR
objectives. Primary mechanisms for these are the Dow Jones Sustainability Index in New
York, the FTSE4Good in London and, more recently, South Africa’s FTSE/JSE
Responsible Investment Index Series.
Civil society organisations and other groups have worked with companies and
governments to develop voluntary standards or guidelines as to how socially
responsible corporations should act. Examples of these guidelines include the
Organization for Economic Co-operation and Development (OECD) Guidelines for
Multinational Enterprises, United Nations (UN) Guiding Principles, Global Reporting
Initiatives, ISO 26000 - Social responsibility, Voluntary Principles on Security and
Human Rights, ten principles of the United Nations Global Compact, the Equator
Principles, the Extractive Industry Transparency Initiative (EITI), and the UN Principles
for Responsible Investment.
Thus, it becomes obvious that many companies engage in CSR because society
expects it of them. The companies want to protect their reputation by meeting these
societal expectations.
5.2.3.2Governmental drivers
Most governments enforce local and national legal systems with which companies must
comply in order to operate in that country. These systems include legislation about
companies, labour relations and environmental management. Many governments also
show considerable interest in encouraging business involvement in social issues
through CSR. The government of the United Kingdom even has a cabinet minister for
CSR, and a variety of policies and initiatives to coax corporations to be more socially
responsible. Governments can also facilitate CSR through the provision of
organisational support. This can even be extended to subsidies for CSR organisations
and activities. Governments may also introduce so-called soft regulation to encourage
corporations to be more socially responsible. Legislation encourages corporate
behaviour that is socially and environmentally responsible, as well as ethical reporting.
In CSR, compliance stretches beyond the letter of the law to the spirit of the law. If a
company complies only with the letter of the law, this means it is doing the bare
minimum to avoid sanction. It is possible to comply with the letter of the law in such a
way that the objectives of the legislation are not achieved. Complying with the spirit of
the law means that the company is doing what can be reasonably expected to further
the objectives of the legislation.
5.2.3.3Market drivers
CSR does not only represent costs for companies. It can also result in various
advantages such as reduced costs or increased revenues. Companies can reduce cost
through CSR by:
•avoiding fines;
•avoiding legal costs;
•using resources efficiently – for example, reducing use of energy or paper means
lower energy or paper costs;
•using alternative raw material sources, such as recycled materials;
•reducing recruiting costs;
•increasing staff retention; and
•reducing the cost of capital.
Companies can also increase revenue through CSR by:
•developing new products or services – for example, carbon credit trading;
•growing markets for services through general programmes such as job creation
and social development, or more specific interventions such as bridging the digital
divide;
•improving access to markets – for example, government procurement;
•avoiding boycotts; and
•exploiting the CSR premium (we have already referred to consumers who prefer to
buy products and services from companies that are socially responsible; some
consumers are prepared to pay a premium for products and services that they
consider socially responsible).
Many companies see CSR as part and parcel of their competitive edge. By integrating
economic strategies with CSR strategies, they can achieve a competitive advantage. In
other words, companies receive a financial reward for addressing social, environmental
and economic problems.
The business case plays a dominant role in motivations for companies to engage in
CSR. What, however, happens to social, economic and environmental issues for which a
business case cannot be made? There are also many factors such as the company’s
visibility, location, size, ownership structure, and the sector and market segments in
which it operates that influence whether there is a business case to be made. Despite
the many claims made on its behalf, there is also no empirical evidence for the business
case for CSR.
5.2.3.4Ethical drivers
Generally speaking, ethics is about deciding between right and wrong
conduct. Business ethics is a subset of ethics that focuses on deciding between right
and wrong in the workplace and in business generally.
Responsibility can be seen as an ethical value. Hence, it goes beyond individual
considerations and is oriented towards the common good. Some thinkers might see the
market system as a subsystem to the social system, and thus believe that enterprises
have a social responsibility as well as a legal and economic responsibility. Companies
might feel ethically responsible for damage resulting from production – for example,
harm inflicted on the environment. They might also feel responsible for the
communities in which they operate, and thus do more than simply comply with the law,
especially in countries with inadequate bureaucratic regulation. For some companies,
CSR is the right thing to do.
The ethical responsibility of a business does not only apply to external damage. It
also applies to responsible business dealings and conduct in the workplace. However,
there is much confused and incorrect thinking about business ethics, as illustrated in
the box that follows.
Ten myths about business ethics
Ethics in the workplace is about prioritising moral values and ensuring that behaviours are
aligned with those values. Myths about business ethics abound. Some of these myths arise
from general confusion about the notion of ethics. Other myths arise from narrow or
simplistic views of ethical dilemmas. Here are ten common myths about business ethics.
Each myth is followed by an explanation that debunks it.
Myth 1: Business ethics is more a matter of religion than management. Diane
Kirrane asserts that ‘altering people’s values or souls isn’t the aim of an organisational ethics
program – managing values and conflict among them is’.
Myth 2: Our employees are ethical, so we don’t need to pay attention to business
ethics. Most of the ethical dilemmas faced by managers in the workplace are highly
complex. Kirrane mentions that when the topic of business ethics comes up, people are
quick to speak of the golden rule of honesty and courtesy. But when presented with complex
ethical dilemmas, most people realise there’s a wide grey area to deal with when trying to
apply ethical principles.
Myth 3: Business ethics is a discipline best led by philosophers, academics and
theologians. Lack of involvement of leaders and managers in business ethics literature and
discussions has led many to believe that business ethics is a fad or a movement, having little
to do with the day-to-day realities of running an organisation. They believe business ethics is
primarily a complex philosophical debate or a religion. However, business ethics is a
management discipline with a programmatic approach that includes several practical tools.
Ethics management programmes have practical applications in other areas of management
areas as well.
Myth 4: Business ethics is superfluous. It only asserts the obvious: ‘Do
good!’ Many people feel that codes of ethics or lists of ethical values to which an
organisation aspires are superfluous because they represent values to which everyone
should naturally aspire. However, the value of a code of ethics to an organisation is its
priority and focus about certain ethical values in that workplace. For example, it’s obvious
that all people should be honest. However, if an organisation is struggling with issues of
deceit in the workplace, prioritising honesty is very important, and honesty should be listed in
that organisation’s code of ethics. Note that a code of ethics is an organic instrument that
changes with the needs of society and the organisation.
Myth 5: Business ethics is a matter of the good guys preaching to the bad guys.
Some writers do seem to claim the moral high ground while lamenting the poor condition of
business and its leaders. However, people who are well versed in managing organisations
realise that good people can take bad actions, particularly when stressed or confused.
(Stress and confusion do not excuse unethical actions – they are reasons.) Managing ethics
in the workplace includes all of us working together to help each other remain ethical and to
work through confusing and stressful ethical dilemmas.
Myth 6: Business ethics is the new policeperson on the block. Many people believe
business ethics is a recent phenomenon because of increased attention to the topic in
popular and management literature. However, business ethics was written about by Cicero 2
000 years ago. Business ethics has been given more attention recently because of the social
responsibility movement that started in the 1960s.
Myth 7: Ethics can’t be managed. Actually, ethics is always managed, but, too often, it
is managed indirectly. For example, the behaviour of the organisation’s founder or current
leader is a strong moral influence on the behaviour of employees in the workplace. Strategic
priorities (profit maximisation, expanding market share, cutting costs and so on) can be very
strong influences on morality. Laws, regulations and rules directly influence behaviours to be
more ethical, usually in a manner that improves the general good and/or minimises harm to
the community. Some people are still sceptical about business ethics, believing that you
can’t manage values in an organisation. Donaldson and Davis note that management is,
after all, a value system. Sceptics might consider the tremendous influence of several ‘codes
of ethics’ such as the Ten Commandments in Christianity or the Constitution of the United
States. Codes can be very powerful in smaller organisations as well.
Myth 8: Business ethics and social responsibility are the same thing. The social
responsibility movement is only one aspect of the overall discipline of business ethics.
Corporations also need to consider how business ethics can be managed. Writings about
social responsibility often do not address practical matters of managing ethics in the
workplace – for example, developing codes, updating policies and procedures, approaches
to resolving ethical dilemmas, and so on.
Myth 9: Our organisation is not in trouble with the law, so we’re ethical. It is
possible to be unethical yet operate within the limits of the law. Examples include withholding
information from superiors, fudging on budgets and constantly complaining about others.
However, breaking the law often starts with unethical behaviour that has gone unnoticed.
The ‘boil the frog’ phenomenon is a useful parable here: if you put a frog in hot water, it
immediately jumps out. If you put a frog in cool water and slowly heat up the water, you can
eventually boil the frog. The frog doesn’t seem to notice the adverse change in its
environment.
Myth 10: Managing ethics in the workplace has little practical relevance. Managing
ethics in the workplace involves identifying and prioritising values to guide behaviours in the
organisation, and establishing associated policies and procedures to ensure those
behaviours are conducted. This could be called values management. Values management is
also important in other management practices – for example, managing diversity, Total
Quality Management and strategic planning.
Source: Free Management Library. n.d. Ten Myths About Business Ethics. Available at http://managementhelp.org/ethics/ethxgde.htm#anchor29959. [Accessed 01 November 2018]. © Carter Mc-Namara,
MBA, PhD, Authenticity Consulting, LLC. Reprinted by permission of Dr Carter McNamara.
The discussion on CSR has alerted us to the fact that corporations are classified as legal
entities or corporate citizens who have certain rights and responsibilities. As
corporations are recognised by law, they can enter into contracts and do business in
selected markets. They can own assets and owe money to others and can sue and be
sued. It is also expected that companies would conduct themselves responsibly towards
stakeholders and use their operating environment sustainably. Yet, it remains the
responsibility of people to make decisions that will ensure that the interests of the
company are looked after. In the next section, we will consider the leadership tasked
with making these decisions.
5.3Corporate governance
5.3.1Corporate governance defined
The word governance is derived from Latin gubernare, which means to steer. Good
governance is thus essentially about ethical and effective leadership. To be ethical,
leadership should be exemplified by integrity, fairness, accountability and transparency.
To be effective, governing bodies need to achieve strategic objectives and positive
outcomes. Ethical and effective leadership should complement and reinforce each other
to achieve an ethical culture, good performance, effective control and
legitimacy.28 Governance thus refers to the way in which an organisation or group
makes decisions about how to manage its affairs. Essentially, corporate governance is
the system by which companies are managed and controlled. It also refers to the
relationship between those who govern and those who are governed.
The board of directors is a group of people assembled to lead and control the
company so that it functions in the best interests of its shareholders. The rights and
responsibilities of directors are conferred on them by various acts, the articles of
association of the company and common law. A director stands in a fiduciary
relationship to the company (the term ‘fiduciary’ is derived from the Latin fiduciarius,
meaning ‘of trust’) and is bound by fiduciary responsibilities. The board is the focal
point of the corporate governance system. Management is primarily responsible for
implementing strategy as defined by the board.
To enable the board to discharge its duties and responsibilities, as well as fulfil its
decisionmaking process effectively, it may delegate some of its functions to board
committees. However, delegating authorities to board committees or management does
not in any way reduce the board’s collective accountability and responsibility for the
performance and affairs of the company.
Boards are composed of both executive and non-executive directors. Executive
directors are members of the management team who are appointed to the board. They
are full-time employees of the company. Executive directors have a fiduciary role as
directors of the company on the one hand. They also have a role as senior management.
Non-executive directors are not involved in the day-to-day operation of the business of
the company and do not receive any remuneration other than their director’s fees. They
are independent of management and should be free from any significant business or
other relationship with the company that could materially hamper their independence.
Non-executive directors should be able to provide independent judgement on issues
facing the company, assist in objectively monitoring and reviewing management’s
performance against budget and company strategy, and ensure adequate protection of
the interests of the company where these may conflict with the personal interests of the
(executive) directors. An independent director is a non-executive director who has no
existing or prior business, employment, consultancy or other relationship with the
company.
The primary roles and responsibilities of governing bodies are depicted in Figure
5.1. As a governing body, it is the board’s responsibility to set and review an
organisation’s strategic direction, approve strategic plans and policies, ensure
organisational accountability and finally, monitor and evaluate strategic execution.
Figure 5.1 illustrates the roles and responsibilities of governing bodies.
Figure 5.1 Primary roles and responsibilities of governing bodies
Source: Institute of Directors Southern Africa. 2016. The King IV Report on Corporate Governance™ in
South Africa 2016 (“King IV Report”). Copyright and trade marks are owned by the Institute of Directors in
Southern Africa and the IoDSA website link is http://www.iodsa.co.za/?page=AboutKingIV p. 21.
There are two separate and very distinct tasks at the top of every company that must be
performed by two separate individuals to ensure a balance of power and authority. The
chairman of the company is responsible for the running of the board and the chief
executive officer is responsible for running the company’s business. It is also
recommended (and sometimes required) that the chairman be an independent nonexecutive director.
5.3.2Corporate governance compliance
The governance of corporations can be on a statutory basis (regulated by law), or as a
code of principles and practices, or a combination of the two. The United States of
America has, for example, chosen to codify a significant part of its governance in an Act
of Congress known as the Sarbanes-Oxley Act (SOX). This statutory regime is known as
‘comply or else’, and there are legal sanctions for non-compliance. In contrast, the 56
countries in the Commonwealth, including South Africa and the 27 states in the
European Union (including the United Kingdom), have opted for a code of principles
and practices on a ‘comply or explain’ basis, in addition to certain governance issues
that are legislated. King IV changed the South African approach to ‘comply and explain’.
Such explanation is done through integrated reporting as discussed later in this chapter.
There are numerous frameworks, standards and codes available to guide companies
towards good governance. Examples include the OECD Principles of Corporate
Governance and the four King Committee reports on corporate governance. There is
always a link between good governance and compliance with the law. Regardless of
whether countries have adopted the ‘comply or else’, or ‘comply and explain’ approach,
good governance is not something that exists separately from the law. However, if there
is conflict between legislation and a governance framework, law prevails.
Voluntary governance codes, such as the King IV report, recommend leading
practices of governance. Although adherence is voluntary, it may trigger legal
consequences as courts would consider all relevant circumstances to determine
appropriate standards for conduct for those charged with governance duties. In this
way provisions contained in widely adopted codes become part of the common law and
adherence, albeit not legislated, may invoke liability.29
It is, however, impossible to stop dishonesty or to legislate morality in companies.
Morality, whether corporate or individual, is driven by a certain mindset. In this sense,
corporate governance is essentially about leadership that is transparent. The leadership
of a company must be seen to be answerable and accountable to that company’s
stakeholders.
5.3.2.1Primary principles of good governance
Good governance practice is established over time and governance codes recognise that
a ‘one-size-fits-all approach’ is not suitable given the differences in operational scope,
size and type of organisations. The focus is thus shifted from mindless compliance to
mindful application, which harnesses the benefits of corporate governance. The King
Reports provide organisations with a model to guide their approach to governance.
Each of these reports includes outcomes, principles and practices. These guidelines
embody the ideal and leading benchmarks to which many organisations aspire on their
journey to good governance. The codes are therefore meant to be scaled in accordance
with consideration to the organisation’s abilities and resources. The 17 principles of
good corporate governance in King IV include:30
The governing body should:
1.Lead ethically and effectively.
2.Govern the ethics of the organisation in a way that supports the establishment of
an ethical culture.
3.Ensure that the organisation is and is seen to be a responsible corporate citizen.
4.Appreciate that the organisation’s core purpose, its risks and opportunities,
strategy, business model, performance and sustainable development are all
inseparable elements of the value creation process.
5.Ensure that reports issued by the organisation enable stakeholders to make
informed assessments of the organisation’s performance and its short, medium and
long-term prospects.
6.Serve as the focal point and custodian of corporate governance in the
organisation.
7.Comprise the appropriate balance of knowledge, skills, experience, diversity and
independence for it to discharge its governance role and responsibilities
objectively and effectively.
8.Ensure that its arrangements for delegation within its own structures promote
independent judgment and assist with balance of power and the effective discharge
of its duties.
9.Ensure that the evaluation of its own performance and that of its committees, its
chair and its individual members, support continued improvement in its
performance and effectiveness.
10.Ensure that the appointment of, and delegation to, management contribute to
role clarity and effective exercise of authority and responsibilities.
11.Govern risk in a way that supports the organisation in setting and achieving its
strategic objectives.
12.Govern technology and information in a way that supports the organisation
setting and achieving its strategic objectives.
13.Govern compliance with applicable laws and adopt non-binding rules, codes and
standards in a way that supports the organisation being ethical and a good
corporate citizen.
14.Ensure that the organisation remunerates fairly, responsibly and transparently
so as to promote the achievement of strategic objectives and positive outcomes in
the short, medium and long term.
15.Ensure that assurance services and functions enable an effective control
environment, and that these support the integrity of information for internal
decision-making and of the organisation’s external reports.
16.Adopt a stakeholder-inclusive approach in the execution of its governance role
and responsibilities that balances the needs, interests and expectations of material
stakeholders in the best interest of the organisation over time.
17.Ensure that responsible investment is practiced by the organisation to promote
the good governance and the creation of value by the companies in which it invests.
These principles embody the aspirations of the journey towards good corporate
governance. Principles build on and reinforce each other and hold true across all
organisations. Each of these principles are accompanied by a set of practices which set a
good foundation for governance. However, corporate governance principles and
practices are dynamic, and evolve. The application and implementation of these
principles differ for different entities, and organisations are thus expected to disclose
how they have adapted these principles to stakeholders. The governance of risk is also
addressed in terms of the board and management’s responsibilities for risk assessment,
management, response, monitoring, assurance and disclosure. Other governance
aspects reviewed in the report are the governance of information technology;
compliance with laws, rules, codes and standards; internal audits; governing
stakeholders’ relationships; and integrated reporting and disclosure.
5.3.3How does corporate governance relate to CSR?
The impact of corporate misconduct and unlawful acts is demonstrated in the box on
page 179. Such scandals are not only harmful to the reputation of corporations
competing globally for customers and talents, but could also result in the demise of the
corporation. They also harm investors, shareholders, employees and the public, who are
all affected by failures in corporate governance. CSR recognises the responsibility of
corporations for their impact on society.
Instead of only asking questions about shareholder value (the bottom line) and the
pay packets of ‘fat-cat’ directors, boards should also ask questions like: What is business
for? What are our core values? Who should have a say in how companies are run? What
is the appropriate balance between shareholders and stakeholders? Which balance
should be struck at the level of the triple bottom line?
Sir Adrian Cadbury redefined corporate governance in this sense as ‘concerned with
holding the balance between economic and social goals and between individual and
communal goals […] the aim is to align as nearly as possible the interests of individuals,
corporations and society’.31
If corporate governance is a leadership challenge and if CSR has evolved as an aspect
of good corporate governance, it follows that the chairperson and his or her board, who
are the focal point of the corporate governance system, should govern CSR programmes.
They have to monitor risks and opportunities, engage with stakeholders, formulate
policies and strategies to be implemented, and monitor this implementation.
Management is responsible for implementing and managing the CSR programme. In this
sense, the optimum structure of CSR mirrors the structure relating to financial
governance: a separation between the day-to-day management of these issues, on the
one hand, and monitoring and assurance (the independent checking of performance) on
the other hand.
A CSR programme should be embedded in a specific board-level structure, such as a
CSR committee. This committee should have a good understanding of CSR. There are
three ways in which the board and the CSR committee can determine how to establish
the corporate policy for CSR:
•A values-based system, in which the CSR policy is aligned with the company’s own
vision, mission, values and guiding principles, is used when a company addresses
CSR in a proactive manner.
•A stakeholder-engagement process, which allows stakeholders to determine
what they want from the company and what they consider to be the issues and
culture of the company, is a reactive approach.
•A combination of both values-based and stakeholder-engagement processes,
which often emerges from an original emphasis on a values-based approach but
develops in a combination approach when the company moves from setting its own
objectives aligned with its values to involving its stakeholders. This allows the
company to ensure that its strategy satisfies its own needs as well as the needs of its
stakeholders.
The policy statement of the CSR committee should cover the company’s vision,
commitment, goals and targets for CSR. Once the board and the CSR committee have
established a policy and strategy for CSR, it will need to be implemented throughout the
company. Each company will have a different way of ensuring the implementation of the
CSR strategy within the management structures of the company, but – generally
speaking, especially in the case of large companies with multiple operating units – it is
often necessary to have a dedicated department that focuses on CSR.
Steinhoff executives may face jail time
Former Steinhoff CEO, Markus Jooste, has been accused of fraud on a grand scale. In one
of the biggest corporate scandals, which became public in December 2017, Jooste and his
executives have been accused of providing false and misleading information with the intent
to commit fraud against Steinhoff’s creditors, employees and shareholders. It is alleged that
they were party to submitting untrue written statements to the company’s accounts. The
impact was widespread, most notably the loss of billions of rands in pension investments of
ordinary people. Dubious accounting irregularities resulted in $11,4 billion being wiped out
by the company, with a debt of R161 billion being revealed through further investigations.
Christo Wiese, who resigned as chairman a week after Mr Jooste’s exit, said that the
scandal came as a ‘bolt from the blue’ and he is looking for answers from Mr Jooste. Mr
Wiese lost more than 80 per cent of his personal fortune because of the scandal. He is now
suing Steinhoff for lost billions. However, observers are questioning the relationship between
the two men, who were college friends and have known each other for decades. Others are
questioning the corporate governance system. Steinhoff has a two-tier board - one for
management, the other supervisory. In this structure Mr Jooste, as the chief executive, was
given a great deal of independence. The supervisory board also relied on the opinions of the
company’s internationally reputed auditors to review the complexities involved in Jooste’s
deals. Questions are also being asked about why regulator concerns were overshadowed. In
many instances key stakeholders turned a blind eye as the sheer momentum of Steinhoff’s
share price signalled prosperity and investor confidence.
Magda Wierzycka, CEO of Sygnia Asset Management, and the only female billionaire
business owner in South Africa said, during a keynote speech, that she had had enough of
cowboys like Markus Jooste and called for business leaders to take a stand against
corruption. Wierzycka is among many calling for harsh punishment, not only for Jooste, but
also for the executives who have turned a blind eye. David Loxton from Dentons SA said,
‘The extent of these allegations show there must have been senior people working together
to either hide or turn a blind eye to what was happening...(rather than) expose what they
suspected’. Investigations were still ongoing at the time of writing but the Financial Services
Board (FSB) said Steinhoff executives might face jail time or a maximum fine of R50 million.
Sources: eNCA. 2017. Steinhoff executives may face jail time: FSB. 13 December. Available
at https://www.enca.com/south-africa/steinhoff-executives-may-face-jail-time-fsb [Accessed 10 October
2018]; Head, T. 2018. Magda Wierzycka wants ex-Steinhoff CEO Markus Jooste ‘thrown in jail’. The South
African. 17 August. Available at https://www.thesouthafrican.com/magda-wierzycka-markus-joostejail/ [Accessed 10 October 2018]; Haffajee. F. 2018. Why is Markus Jooste in Parliament and not on
trial? Fin24. 06 September. Available at https://www.fin24.com/Opinion/ferial-haffajee-why-is-markusjooste-in-parliament-and-not-on-trial-20180905 [Accessed 10 October 2018]; Cotterill. J. 2018. Spotlight on
governance as Cape champion turns pariah. Financial Times, 22 September. Available
at https://www.ft.com/content/d673288a-7bbb-11e8-af48-190d103e32a4 [Accessed 10 October 2018].
In conjunction with the relevant board committee, the CSR department is
responsible for identifying the appropriate key performance indicators (KPIs) for
implementing the CSR policy and for measuring company performance with respect to
these indicators. This information will need to be collected regularly and systematically,
and it will need to be reported on to the board committee so that this committee can
monitor the implementation of the policy.
The CSR department will also need to ensure that the various business units and line
departments, such as human resources, know about the CSR policy and are doing what
they can to implement it.
5.4Sustainable development
Sustainability is the focus of this chapter, as the purpose of CSR is to create
sustainability. We have established that the survival and success of organisations are
intertwined with, and related to, three interdependent subsystems: the triple context of
the economy, society, and the natural environment.32 To illustrate practically how
companies take responsibility for sustainability and engage with stakeholders, we will
consider Kumba Iron Ore’s approach. This company is ‘a leading supplier of high-quality
iron ore to the global steel industry that is focused on creating and sharing value to a
range of stakeholders’.33 This company believes that sustainability and building healthy
stakeholder relationships is vital to business success. It aims to build lasting
stakeholder relationships and to allow stakeholders to become partners.34
5.4.1Defining sustainable development
‘Sustainability’ means different things to different people. As a result, there are many
definitions of the term. In 1987, the Brundtland Commission supplied the following
definition: ‘Sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.’
This definition encapsulates two key concepts:
•The concept of needs, in particular the essential needs of the world’s poor, to
which overriding priority should be given; and
•The idea of limitations imposed by the state of technology and social organisation
on the environment’s ability to meet present and future needs.
The Brundtland Commission’s definition contributed to the understanding that
sustainable development encompasses several areas and highlights sustainability as the
idea of environmental, economic and social progress and equity, all within the
limits of the world’s natural resources.
The International Institute for Sustainable Development (IISD) explains sustainable
development in terms of systems thinking. All definitions of sustainable development
require that we see the world as a system – a system that connects both space and time.
When the world is considered as a system over space, it is easy to see that air pollution
from North America affects air quality in Asia, and that pesticides sprayed in Argentina
could harm fish stocks off the coast of Australia. When the world is considered as a
system over time, it becomes obvious that the decisions made by previous generations
about how to farm the land continue to affect agricultural practice today and that the
economic policies endorsed today will have an impact on urban poverty in years to
come.35
The IISD further states that quality of life can also be a system. Physical health is
important, but so is access to education. The value of a secure income is diminished for
a person living in an area where the air is polluted. Freedom of religious expression is
important, but a person whose family is starving has little interest in this freedom. The
concept of sustainable development is thus rooted in this sort of systems thinking. The
problems that the world faces are complex and serious and cannot be addressed in
terms of the way in which they were created.36 In the South African setting, addressing
inequality in society through economic transformation is a good example of a challenge
that affects all three of these sub-systems within which organisations operate.37
As a consequence, many intergovernmental conferences have been dedicated to this
shared priority. The most influential summits have been the Rio Earth Summit (1992);
the World Summit on Sustainable Development (2002); and the Rio+20 United Nations
Conference on Sustainable Development (2012). The global development dialogue has
also resulted in the development and adoption of principles and goals to solve the
interrelated economic, social and environmental challenges of our world. Most notable
are the United Nations Global Compact principles (1990), the Earth Charter (1992), the
Millennium Development Goals (2000), Sustainability Reporting Guidelines G3 (2006)
and the Paris Agreement (2016).
Figure 5.2: Kumba’s stakeholder engagement governance framework
Source: Kumba Iron Ore Limited. 2018. Sustainable Development Report 2017. Available
at https://www.angloamericankumba.com/~/media/Files/A/Anglo-American-Kumba/annual-report2018/kumba-sustainability-report-2017.pdf [Accessed 20 November 2018], p. 18.
Society doesn’t just rely on governments to take responsibility for sustainability;
instead they expect organisations and their leaders to take an active role in interacting
with, and responding to, the challenges and opportunities presented in the dynamic
system of the triple context in which they operate. Such an integrated approach is a
hallmark of sustainable development. The key to sustainability is thus to become
attuned to the needs, interests and expectations of stakeholders through meaningful
engagement and mutual value creation.
Sustainability considerations are entrenched in Kumba’s governance structures and
sustainability best practice is integrated in their core processes. The company applies a
well-defined process to identify and evaluate opportunities and risk, which are material
to their business. Figure 5.2 illustrates Kumba’s sustainability governance framework.
Key to sustainable development is stakeholder engagement.
5.5Stakeholder engagement
The concept of a stakeholder has already been mentioned in this chapter. You have
learnt that one of the ways in which the board and the CSR committee can determine
how to establish the corporate policy for CSR is a stakeholder-engagement process.
Other reasons why companies engage with stakeholders include the following:
•Responsible companies want to understand and respond to society’s expectations
of what it means to be, for example, a responsible manufacturer, marketer and
employer.
•Engagement is a means to help build better relationships with all parties, resulting
in improved business planning and performance.
•Engagement helps to provide opportunities to align business practices with societal
needs and expectations, helping to drive long-term sustainability and shareholder
value.
5.5.1Defining stakeholders
Stakeholders are persons or groups who are potentially affected by, or affect, a
company’s business activity. Stakeholders could have, or claim, ownership rights or
interest in a corporation’s activities. These claims may be legal or moral, individual or
collective. Stakeholders with similar claims, rights or interest can be classified as
belonging to the same group – for example, staff, clients, and traditional leaders.38
On a basic level, there are two kinds of stakeholders. Primary stakeholders are
stakeholders whose ongoing support for the company is vital for its survival. These
stakeholders commonly have some contractual or financial relationship with the
company. Most importantly, primary stakeholders include shareholders and employees.
A company cannot survive if shareholders or employees withdraw their support for the
company. In many instances, government is also a primary stakeholder. For example,
government would be a primary stakeholder in a mining company because the company
would depend on government permission to mine. A local community could also be a
primary stakeholder of a mining company, especially if that community owned the land
that the company needed. Local community protest or sabotage can make a mine’s
operation impossible.
Secondary stakeholders are stakeholders who have a less direct impact on the
company. Secondary stakeholders could include environmental NGOs or the media, for
example. However, there is no clear distinction between primary and secondary
stakeholders. A secondary stakeholder can become a primary stakeholder if the
conditions change. For example, a local group that is small and powerless probably has
little impact on a company, but if it gets more local support or if it has a convincing legal
argument, it can quickly become a primary stakeholder.
As a result, stakeholders impose various responsibilities on the company. All
stakeholders are important, but the degree to which they are prioritised by the
company may change depending on the issue, and factors such as influence, knowledge,
credibility and legitimacy.
Kumba considers stakeholders as groups who are important to the company and its
operations, as well as those impacted by, or have the potential to impact, the company.
The company has regular, proactive and meaningful engagement with key stakeholders
to reinforce their collaborative approach. Stakeholders are partitioned into nine broad
stakeholder groups, namely government and political groups; shareholders and
investors; employees and trade unions; industry bodies; communities; suppliers;
business and development partners; media and civil society (e.g. NGOs).39
Applying the concept One-way communication, consultation and
dialogue
It is worthwhile differentiating specifically between the terms ‘one-way communication’,
‘consultation’ and ‘dialogue’ because they are often used interchangeably but mean
completely different things when referring to stakeholder engagement. Communication
generally means ‘any manner of information sharing with stakeholders, generally through
one-way, non-iterative processes’. It needs to be accurate and timely. Channels of
communication include company brochures and reports, newsletters, briefings, press
releases, conference presentations, displays and websites.
Consultation is ‘the process of gathering information or advice from stakeholders and
taking those views into consideration to amend plans, make decisions or set directions’. The
organisation arranges the consultation, sets the terms, and the final decision lies with the
company. Consultation enables companies to improve their decision-making and
performance by soliciting external perspectives on current issues; community needs and
expectations; or impacts of services or performance. Channels for consultation include
questionnaire surveys, focus groups, ad hoc advisory meetings and feedback mechanisms
such as response forms.
Dialogue involves an ‘exchange of views and opinion to explore different perspectives,
needs and alternatives, with a view to fostering mutual understanding, trust and co-operation
on a strategy or initiative’. Participants in a dialogue seek to understand and learn from each
other’s perspectives and experiences. They do not seek to defend their own perspectives, as
in a debate. Open dialogue based on mutual respect leads to learning, trust and cooperation. Dialogue often involves long-term relationships. It requires a high degree of
transparency and trust. Both parties must be willing to listen, put aside bias, suspend
judgement and take the other party’s views seriously. Dialogue often aims to find
agreements for future action. There should be an understanding that trade-offs and
compromise may be necessary. Channels for dialogue include multi-stakeholder forums,
long-term advisory panels, leadership summits, one-on-one meetings, roundtable sessions
and workshops and virtual engagement on intranets and the Internet.
Source: Stakeholder Research Associates Canada Inc. Partridge, K. Jackson, C., Wheeler, D. & Zohar, A.
2005. From words to action. The Stakeholder Engagement Manual. Volume 1: The guide to practitioners’
perspectives
on
stakeholder
engagement.
Available
at http://stakeholderresearch.com/wpcontent/uploads/sra-2005-words-to-action-stakeholder-engagement-01.pdf pp. 6, 14, 21, 22. Reprinted by
permission of Stakeholder Research Associates Canada Inc.
5.5.2Defining engagement
You may define engagement as a promise to marry someone and associate the term
with a diamond ring. However, in the context of stakeholder engagement, this term
refers to an ongoing and multifaceted process between the corporation and
stakeholders that can include:40
•providing information;
•capacity-building to equip communities and stakeholders to engage effectively;
•listening and responding to community and stakeholder concerns;
•including communities and stakeholders in relevant decision-making processes;
•developing goodwill and a better understanding of objectives and priorities leading
to confidence in decisions; and
•establishing a realistic understanding of potential outcomes.
The parties to engagement may change over time, but engagement itself is a continual
process. The different levels of engagement are set out in Table 5.1 on page 187. The
level of engagement is determined by the goals aspired to through the interaction with
stakeholders, the mode of communication with stakeholders, the nature of the
relationship between the company and its stakeholders, and the engagement approach
used with the stakeholders.
Kumba’s stakeholder engagement strategy is self-regulating and informed by
various principles, standards, rules and guidelines. The company applies a combination
of engagement initiatives to meaningfully engage with stakeholders. These
engagements, as well other CSR initiatives, are reported in compliance with listing and
legal requirements. Sustainability reporting provides a transparent account to
stakeholders on how Kumba addresses the most material sustainability issues. The
annual sustainability report is compliant to the GRI’s (formerly Global Reporting
Initiative) Sustainability Reporting Standards (core compliance) and their Mining Sector
Supplement; the AA1000 stakeholder engagement standard; the sustainable
development principles and reporting framework of the International Council on
Mining and Metals (ICMM); and the principles of the United Nations Global Compact
(UNGC). The company also publishes an annual Integrated Report (IR), Annual Financial
Statements (AFS), and an Ore Reserves and Mineral Resources (ORMR) report. The
reporting process for all reports is guided by the principles and requirements contained
in International Financial Reporting Standards (IFRS), the IIRC’s International <IR>
Framework, the GRI’s Standards, the King Code on Corporate Governance 2016 (King
IV), the JSE Listings Requirements and the Companies Act (No. 71 of 2008). Finally, the
company uses a combined assurance model to provide assurance from management
and from internal and external assurance providers. For example,
PricewaterhouseCoopers (PwC) has been appointed to provide an independent
assurance over selected sustainability key performance indicators.
5.5.3Principles for stakeholder engagement
Several important approaches to guide and govern the entire stakeholder-engagement
process are described below. Note that different companies will apply these approaches
differently with each stakeholder issue.
Kumba’s philosophy of stakeholder engagement is informed by its corporate values,
which are:41
•Health and safety: Safety and health are always first on our agenda. We are
committed to zero harm. We believe that all fatalities and injuries are preventable
and that by working together we can make safety and health a way of life, inside and
outside of the workplace.
•Care and respect: We always treat people with respect, dignity and common
courtesy – regardless of their background, lifestyle or position. We are building trust
through open, two-way communication every single day.
•Integrity: Integrity demands taking an honest, fair, ethical and transparent
approach in everything we do. It is not about being popular; it is about always doing
the right thing.
•Accountability: We take ownership of our decisions, our actions and our results.
We deliver on our promises and acknowledge our mistakes. Above all, we never pass
blame.
•Collaboration: No one here is on their own. We are one company with a shared
ambition – all working together to make appropriate decisions and get things done
more effectively.
•Innovation: Challenging the way things have always been done is a key priority. By
actively developing new solutions, encouraging new ways of thinking and finding
new ways of working, we are significantly improving our business.
Key approaches to the stakeholder-engagement process
A company that has grasped the importance of actively developing and sustaining
relationships with affected communities and other stakeholders throughout the life of its
project will reap the benefits of improved risk management and better outcomes on the
ground. On the other hand, a company that is perceived as engaging with stakeholders only
when engagement suits its purposes, or when it wants something from those stakeholders,
may be undermining its own interests.
Remember these five key words throughout the stakeholder-engagement process:
•Involvement: Encourage broad involvement by welcoming interested parties and
respecting their roles. Build existing relationships and find new participants to enrich
dialogue.
•Candour: Be comprehensive. Make sure that you consider every issue. Build trust by
creating an environment in which different opinions are welcome. Be candid. Disclose
your agenda, assumptions, goals and boundaries.
•Relevance: Make the process relevant by focusing on the issues of greatest
importance. Share knowledge so that all participants have access to pertinent
information. Ensure that the process is timely and that the process takes place when
new information can influence decisions and actions.
•Learning: Uncover new perspectives. Seek mutual understanding and identify mutually
beneficial solutions to problems. Focus on the future. Emphasise what can be done to
resolve issues.
•Action: Act on results by applying what has been learnt to improve business planning
and decision-making. Provide stakeholders with evidence of how the results of the
process will be used.
Source: International Finance Corporation. 2007. Stakeholder Engagement: A good practice handbook for
companies
doing
business
in
emerging
markets.
Available
at https://www.ifc.org/wps/wcm/connect/938f1a0048855805beacfe6a6515bb18/IFC_StakeholderEngagem
ent.pdf?-MOD=AJPERES [Accessed 29 November 2018].
5.5.4The stakeholder-engagement process
The information that follows provides a framework for the stakeholder-engagement
process.
Steps in the stakeholder-engagement process
The stakeholder-engagement process can be implemented by following the six basic steps
explained below:
•Prepare. Identify and understand the territory to be explored through the engagement
process with stakeholders. Determine the most important issues in which stakeholder
engagement might be helpful and which kinds of stakeholders might be considered for
engagement.
•Plan. Set objectives and parameters for the engagement process and identify and
prioritise stakeholders with whom to engage. Decide how an adequate objective for the
engagement process can be set and how the process can be kept within bounds.
Consider who should be accountable for engaging and how to determine exactly which
stakeholders should be involved. Decide on the best mode of discussion to have and
how to measure the success of the process.
•Design. Co-develop the engagement plan, including the agenda and logistics, to meet
the engagement objectives. Determine how and when to extend an invitation to explore
whether engagement is possible and which objectives might be mutually agreed to for
the engagement. Consider the best way to conduct the sessions, whether an
independent third-party facilitator will be required, and which logistics and rules must be
in place. Decide whether it is necessary to verify or audit the engagement.
•Engage. Successfully meet the objectives through execution of the engagement plan
with stakeholders. Before doing this, establish whether the correct background
information, materials and training to begin the engagement are available. Decide on the
steps or actions that will follow the engagement.
•Evaluate. Assess the outcomes of engagement for both the company and stakeholders
against specific objectives. Decide whether further engagement sessions are necessary
and use the predetermined criteria to assess whether the engagement was successful.
Consider the outcomes and establish whether the process was helpful.
•Apply. Share information and integrate the outcomes of the engagement process
appropriately into business practices. Decide how to ensure that the results of the
engagement reach the right internal decision-makers and how to inform stakeholders
about follow-up from the engagement session.
Source: Compiled from information in International Finance Corporation. 2007. Stakeholder engagement:
A good practice handbook for companies doing business in emerging markets. For more information go
to https://www.ifc.org/wps/wcm/connect/938f1a0048855805beacfe6a6515bb18/IFC_StakeholderEngagement.pdf?MOD=AJPERES.
The outcome of the engagement process needs to be a well-documented plan
outlining stakeholder concerns, their impact, as well as the required responses. Table
5.1 is an example of how engagement with the government, regulatory and political
stakeholder group was documented within Kumba’s annual sustainability report.
Table 5.1: Government, regulatory and political stakeholder group – material interest and
strategic response
Source: Kumba Iron Ore Limited. 2018. Sustainable Development Report 2017. Available
at https://www.angloamericankumba.com/~/media/Files/A/Anglo-American-Kumba/annual-report2018/kumba-sus-tainability-report-2017.pdf [Accessed 20 November 2018], p. 21.
Kumba and many other corporations internally align their overall stakeholder
engagement process to the AA1000 AccountAbility Principles Standard. The AA1000
AccountAbility Principles Standard, AA1000APS (2008),42 includes three principles: the
foundation principle of inclusivity and the principles of materiality and responsiveness.
Together, the three principles support the realisation of accountability.
The principle of inclusivity prescribes that an organisation shall be inclusive and
allows stakeholders to participate in developing and achieving an accountable and
strategic response to sustainability. To allow for inclusivity, the stakeholder
participation process needs to make provision for:
•the necessary competencies and resources to enable stakeholder participation;
•the identification and understanding of stakeholders in terms of their capacity to
engage, and their views and expectations;
•the planning, development and implementation of appropriate engagement
strategies, plans and modes of engagement for stakeholders; and
•established ways for stakeholders to be involved in relevant decisions.
The principle of materiality prescribes that organisations identify their material issues.
Material issues are issues that are relevant and significant to an organisation and its
stakeholders. These issues would typically influence the decisions, actions and
performance of an organisation or its stakeholders. The materiality determination
process requires:
•the identification of issues that stem from a wide range of sources, including the
needs and concerns of stakeholders, societal norms, financial considerations, peerbased norms and policy-based performance;
•that issues are evaluated against suitable and explicit criteria that are credible,
clear and understandable as well as replicable in a manner that is defensible and
assurable;
•that findings from the evaluation should be used to determine the significance of
each issue; and
•that organisations take into account the changing sustainability context and
maturity of issues and concerns, and include a means of addressing conflicts or
dilemmas between different expectations regarding materiality.
Finally, the principle of responsiveness prescribes that organisations shall respond to
stakeholder issues that affect its performance. This principle requires organisations to
have the required competencies as well as a process in place for developing appropriate
responses. Responses should be timely and need to be comprehensive and balanced.
These principles oblige an organisation to involve stakeholders in identifying,
understanding and responding to sustainability issues and concerns, and to report,
explain and be answerable to stakeholders for decisions, actions and performance.
Kumba has regular, proactive and meaningful engagements with their key stakeholders.
An example is the annual 2017 Stakeholder Day. Such events are used to bring directors
and the executive together with provincial and local government, labour unions,
business partners, development partners, suppliers, host community groups and civil
society, to discuss transformation and sustainability. Constructive feedback received
through this event also informed their strategic responses to stakeholder interests.43
5.5.5The contribution of CSR to sustainable development
The private sector has the finances, management expertise and technology to contribute
to sustainable development through CSR. A corporation with an interest in ecological
issues might extend this interest to a business interest in sustainable development.
Another example is the substantial power that business enjoys in many issues of
sustainable development. This includes the power to self-regulate and to regulate its
supply chains to enhance sustainable development. See, for example, the value created
by Kumba for stakeholders in 2017 in Figure 5.3.
Figure 5.3 Kumba’s value creation for stakeholders in 2017
Source: Kumba Iron Ore Limited. 2018. Sustainable Development Report 2017. Available
at https://www.angloamericankumba.com/~/media/Files/A/Anglo-American-Kumba/annual-report2018/kumba-sustainability-report-2017.pdf [Accessed 20 November 2018], p. 3.
However, there are also limits to the extent to which corporations can be held
responsible for sustainable development. Many negative contributions to sustainable
development stem from the behaviour of individual members of society. For example,
some practices exclude sections of society from the benefits of development, thus
threatening social conflict. The failure to adopt sustainable waste-disposal practices and
the excessive consumption of public resources such as water are also contrary to
sustainable development. Many threats to sustainable development stem from
governmental deficits, such as the failure to develop and implement global limits on
carbon emissions or the failure to inhibit the destruction of diminishing natural
resources such as forests.
Responsible business is therefore a requirement of sustainable development, but it
is not sufficient to ensure sustainable development. Corporations, communities,
governments and individuals need to work together to achieve this goal.
5.6Summary
This chapter began by introducing corporate social responsibility (CSR) and the related
concepts of corporate social investment and corporate citizenship. It explored CSR by
giving a historical overview of its development, followed by a discussion on the social,
governmental, market and ethical drivers of CSR programmes and the importance of
implementing CSR. The chapter looked at the people responsible for taking leadership
of CSR and for formulating policies and frameworks, and the people responsible for
legislating policies and frameworks and for implementing programmes. Corporate
governance and its relation to CSR were examined. In a discussion on stakeholder
engagement, the term as well as its principles and processes were defined and explored.
The chapter concluded by defining sustainable development and looking at the
contribution of CSR to sustainable development.
Small business perspective
Corporate social responsibility (CSR) is not limited to large corporations. The first word of the
term ‘corporate social responsibility’ seems to suggest that only corporates are affected by
this issue. This is, however, a misconception, as CSR increasingly affects all businesses,
whatever their size or sector.
Although the requirements of CSR are less formalised for small businesses, CSR
involvement is readily and quietly evident in the small business sector. Small businesses
are, for the most part, locally owned and staffed. Their customers are usually concentrated in
limited catchment areas, often rural and deprived. These small businesses are both a source
of goods for sale and work opportunities. They may not be directly engaged in CSI activity,
but they have an unseen CSI impact in their support of the social fabric of their communities,
simply through their presence.
CSR is not a simple task. It may be challenging for small businesses to understand
exactly what CSR is and how they should identify and formalise their CSR contributions.
Because small businesses do not have access to the same resources that corporates have,
the extra workload will become the responsibility of the already overworked owner-manager,
who may then question the advantage of putting formal CSR policies in place.
Corporate social responsibility thus needs to be all-embracing and the CSR agenda
should recognise the diversity of the small business community and its ability to contribute to
CSR.
Source: Adapted from Rabin, E. 2003. CSR Applies to Small Businesses Too. Green Biz. Available
at http://www.greenbiz.com/blog/2003/08/14/csr-applies-small-businesses-too. [Accessed 29 November
2018].
KEY TERMS
business ethics
King Reports on Corporate Governa
corporate citizenship (CC)
partnership
corporate governance
primary stakeholders
corporate social investment (CSI)
secondary stakeholders
corporate social responsibility (CSR)
stakeholder engagement
environmental, economic and social progress and equity
sustainability report
ethics
sustainable development
executive
triple bottom line (TBL)
Questions for discussion
Reread the case study at the beginning of the chapter and answer the following
questions:
1.In your opinion, what are the main drivers of Investec’s CSR programme? Explain
your answer.
2.Give an example of Investec’s contribution to sustainable development.
3.Explain what is meant by the term ‘corporate social investment’ (CSI)? Use a
Investec CSI project to support your explanation.
4.How does a sustainability report differ from a financial report?
5.Explain how Investec’s CSR programme finds expression in its corporate
governance.
Multiple-choice questions
1.Which of the following statements represents good corporate-governance
practices in a company?
a.The executive chairperson is responsible for the running of the board.
b.The chief executive officer is an independent director.
c.The chairperson manages the CSR programme.
d.The chairperson provides leadership for the CSR programme.
2.Which of the following concepts does not relate to discourse on sustainable
development?
a.The United Nations Global Compact
b.The UN Conference on Environment and Development
c.The Millennium Development Goals
d.None
3.Which of the following themes were part of a CSR discourse in 2018?
i.Diversity conversations
ii.Workplace harassment and inequality
iii.Corporate activism
iv.Prioritising privacy and data protection
Now select the correct answer
a.i, ii, iii
b.i, iii, iv
c.ii, iii, iv
d.i, ii, iii, v
4.Which of the following aspects are associated with defining stakeholder
engagement?
i.Capacity-building to equip communities and stakeholders
ii.Listening and responding to community and stakeholder concerns
iii.Including communities and stakeholders in relevant decision-making
processes
iv.Not establishing a realistic understanding of potential outcomes
Now select the correct answer
a.i, ii, iii
b.i, iii, iv
c.ii, iii, iv
d.i, ii, iii, v
5.Which of the following represent the basic steps in the stakeholder-engagement
process?
i.Prepare, plan, design, engage
ii.Plan, design, engage, apply
iii.Prepare, Plan, Design, engage, evaluate, apply
iv.Design, engage, evaluate
Now select the correct answer
a.i
b.ii
c.iii
d.iv
References
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November 2018].
4.Fortune. 2018 Global 500. Available at http://fortune.com/global500/list/ [Accessed
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empowering them to get more out of life. The Business in Society Handbook. Available
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port/IoDSA_King_IV_Report_-_WebVe [Accessed 15 September 2018].
14.Institute of Directors in Southern Africa. 2016. KING IV: Report on Corporate
Governance for South Africa. Available
at https://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Re
port/IoDSA_King_IV_Report_-_WebVe [Accessed 15 September 2018].
15.Norman, W. & MacDonald, C. 2004. Getting to the Bottom of ‘Triple Bottom
Line’. Business Ethics Quarterly, 14(2): 243–262.
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Governance for South Africa. Available
at https://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Re
port/IoDSA_King_IV_Report_-_WebVe [Accessed 15 September 2018].
17.Slaper, T.F. & Hall, T.J. 2011. The triple bottom line: What is it and how does it
work? Indiana Business Review 86(1): 48.
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Governance for South Africa. Available
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port/IoDSA_King_IV_Report_-_WebVe [Accessed 15 September 2018].
19.McPherson, S. 2018. 8 Corporate Social Responsibility (CSR) trends to look for in
2018. Forbes, 12 January. Available
at https://www.forbes.com/sites/susanmcpherson/2018/01/12/8-corporate-socialMresponsibility-csr-trends-to-look-for-in-2018/#695c4e8a40ce [Accessed 12
September 2018].
20.Bac, L. 2018. Percentage of women in senior roles in South Africa creeps up. BBrief,
8 March. Available at https://www.bbrief.co.za/2018/03/08/percentage-of-womenin-senior-roles-in-south-africa-creeps-up/ [Accessed 14 November 2018].
21.Berkeley. 2018. Guide to Managing Human Resources – Chapter 12: Managing
Diversity in the Workplace. Available at https://hr.berkeley.edu/hr-network/centralguide-managing-hr/managing-hr/interaction/diversity/principles [Accessed 8
September 2018].
22.Mboweni. O. 2016. Sipho Pityana: It is time we accept that our leaders in the ANC
have been captured. Mail & Guardian, 30 August. Available
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23.Omarjee, L. 2018. Sipho Pityana to lead Business Unity SA. Fin24, 12 June. Available
at https://www.fin24.com/Economy/sipho-pityana-to-lead-business-unity-sa20180612 [Accessed 15 September 2018].
24.Cotterill. J. 2018. South Africa: How Cape Town beat the drought. Financial Times, 2
May. Available at https://www.ft.com/content/b9bac89a-4a49-11e8-8ee8cae73aab7ccb [Accessed 01 November 2018].
25.Marriage, M. 2018. KPMG loses 20 audit clients in South Africa since 2017. Financial
Times, 3 August. Available at https://www.ft.com/content/bcaeba6a-9667-11e8-b747fb1e803ee64e [Accessed 15 September 2018].
26.Ellis, M. 2018. 4 Lessons for businesses on South Africa’s biggest data
breach. Memeburn, 22 January. Available at https://memeburn.com/2018/01/southafrica-data-breach-lessons/ [Accessed 15 November 2018].
27.Visser, W. 2015. Cowboys, spaceships and CSR 2.0, GreenBiz, 23 May 2015.
28.Institute of Directors Southern Africa. 2016. The King IV Report on Corporate
Governance™ in South Africa 2016 (“King IV Report”). Copyright and trade marks are
owned by the Institute of Directors in Southern Africa and the IoDSA website link
is: http://www.iodsa.co.za/?page=AboutKingIV pp.40-41.
29.Ibid.
30.Ibid, pp. 40-41.
31.Cadbury, A. 1999. Corporate Governance: A Framework for Implementation –
Overview. Available
at http://documents.worldbank.org/curated/en/831651468781818619/pdf/30446.p
df [Accessed 29 November 2018].
32.Institute of Directors in Southern Africa. 2016. KING IV: Report on Corporate
Governance for South Africa. Available
at https://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Re
port/IoDSA_King_IV_Report_-_WebVe [Accessed 15 September 2018].
33.Anglo American -Kumba Iron Ore. 2018. What we do. Available
at https://www.angloamericankumba.com/about-us/what-we-do.aspx [Accessed 01
October 2018].
34.Anglo American -Kumba Iron Ore. 2018. Our stakeholders. Available
at https://www.angloamericankumba.com/sustainability/approach-and-policies/ourstakeholders.aspx [Accessed 01 October 2018].
35.IISD. 2018. Sustainability. Available at https://www.iisd.org/topic/sustainabledevelopment
36.Ibid.
37.Institute of Directors in Southern Africa. 2016. KING IV: Report on Corporate
Governance for South Africa. Available
at https://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Re
port/IoDSA_King_IV_Report_-_WebVe [Accessed 15 September 2018].
38.Clarkson, M.B.E. 1995. A stakeholder framework for analysing and evaluating
corporate social performance. Academy of Management Review, 20(1): 92–117.
39.Anglo American – Kumba Iron Ore. 2018. Our stakeholders. Available
at https://www.kumba.co.za/~/media/Files/A/Anglo-American-Kumba/annualreport-2018/section-wise/stakeholder-engagement.pdf [Accessed 01 October 2018].
40.Ministerial Council on Mineral and Petroleum Resources. 2005. Principles for
Engagement with Communities and Stakeholders. Available at
[https://www.commdev.org/userfiles/files/1171_file_Principles_for_Community_Enga
gement20060116133355.pdf [Accessed 29 November 2015].
41.Kumba Iron Ore Limited. 2018. Sustainable Development Report 2017. Available
at https://www.angloamericankumba.com/~/media/Files/A/Anglo-AmericanKumba/annual-report-2018/kumba-sustainability-report-2017.pdf [Accessed 20
November 2018], p. 2.
42.AccountAbility. 2008. AA1000 AcountAbility Principles Standard 2008. Available
at https://www.accountability.org/wpcontent/uploads/2016/10/AA1000APS_english.pdf [Accessed 29 November 2018].
43.Kumba Iron Ore Limited. 2018. Sustainable Development Report 2017. Available
at https://www.angloamericankumba.com/~/media/Files/A/Anglo-AmericanKumba/annual-report-2018/kumba-sustainability-report-2017.pdf [Accessed 20
November 2018].
CHAPTER 6
Introduction to general
management
Sharon Rudansky-Kloppers
The purpose of this chapter
Entrepreneurs identify opportunities and establish businesses to produce the products and
services that the market needs. Entrepreneurs are the driving force behind the venture, but
they are not necessarily the only key success factor. Businesses, or the ideas and new
ventures of entrepreneurs, need to be managed. That is, the resources deployed in the
business – such as people, money, equipment and knowledge – must be managed in such a
way that the business reaches its profit and other goals. This means that the resources must
be planned, organised, led and controlled so that the business maximises its profits. This
chapter describes the role of management in the business organisation and examines the
four fundamental management functions of the management process, namely planning,
organising, leading and control. It also explains the different levels and kinds of management
in the business and gives an overview of the development of management theory.
Learning outcomes
On completion of this chapter you should be able to:
•give an overview of the role of management in businesses
•describe the four fundamental management functions, namely planning, organising,
leading and controlling
•explain the management process
•comment on the different levels and functional areas of management in the business
organisation
•describe the various schools of thought in management
•describe the development of management theory.
6.1Introduction
In Chapter 2, we discussed the entrepreneur, who initiates new ventures and
establishes new business organisations. In Chapter 3, we examined the different types
of business organisations, such as a partnership, a closed corporation, a private
company, and so on. These different organisations, like the many other kinds of
organisations such as hospitals, schools and sports clubs that serve society, need to be
managed. The purpose of this chapter is to examine the general principles involved in
the management of a business.
The case study that follows provides an illustration of how these management tasks
are applied in a real-life situation in South Africa.
6.2The role of management
An organisation may be described as consisting of people and resources, and certain
goals that have to be reached. These predetermined goals, which may differ from one
organisation to the next, constitute the purpose of an organisation, because humans, as
social beings, arrange themselves in groups to achieve goals that would be too difficult
or too complex for an individual to achieve alone. For this reason, a squash club
endeavours to get to the top of the league, a hospital tries to make its services as
productive and efficient as possible, a political party tries to win an election, and a
business endeavours to make a profit and achieve its goals, to mention but a few
examples.
However, organisations do not achieve their goals automatically. In addition to the
people, physical resources, financial resources and knowledge in an organisation, a
further element is necessary to direct all these resources and activities effectively
towards goals. That indispensable element is management. Without this, no purposeful
action is possible. All members of the organisation would pursue their own ends in their
own ways, and the result would be a waste of time and valuable resources, and the
organisation would ultimately fail.
Consider the case study that follows. As much as Woolworths’ history appears to be
a story of easy success, its success can be attributed to its sound management
principles, practices and managers at all levels of the organisation.
One of the most common causes of failure in a business, especially a small one, is
poor management. Table 6.1 indicates the main causes of business failure.
It is becoming more and more widely recognised and accepted that the performance
and success of an organisation – whether large or small, profit-making or non-profitmaking, private or public – depends on the quality of its management.
Table 6.1: Main causes of business failure
Bad management/managerial incompetence
Lack of managerial experience
Lack of industry experience
Lack of clear objectives
Poor business planning
Poor cash flow management
Over expansion
Poor marketing
Poor business location
Economic conditions
Failure to adapt to a changing environment
Inadequate pricing
Poor human resource relations
Failure to understand your market and customers
Inadequate financing
No feedback from customers
Absence of performance monitoring
Poor debtor management
Overborrowing
Lack of financial skills
Failure to innovate
Competition
Sources: Entrepreneur. 2017. Ten reasons why 7 out of 10 Businesses Fail within 10 years. Available
at https://www.entrepreneur.com/article/299522. [Accessed 9 December 2018]; Moya.K. 2018. What
causes small businesses to fail. http://www.moyak.com/papers/small-business-failure.html. [Accessed 9
December 2018]; Amicable Business Coaching. 9 Reasons why businesses fail. Available
at http://www.effectivebusiness.info/failed_business.htm. [Accessed 11 June 2012]; Balovich, D. 2010.
What causes businesses to fail? Available at http://www.creditworthy.com/3jm/articles/cw12710.html.
[Accessed 11 June 2012]; Ballowe. T. 2015. Ten common causes of business failure. Available
at http://onstrategyhq.com/resources/ten-common-causes-of-business-failure/. [Accessed 1 December
2015].
Management is therefore indispensable to any business for the following reasons:
Management directs a business towards its goals. Without the input of managers,
the resources of the business would not be channelled towards reaching its goals, and in
a market economy few businesses are able to reach their profit objectives without
managers. No business can survive if it cannot make a profit. In short, a business cannot
maintain the purpose for its existence without effective management.
CASE STUDY: Management in action
Woolworths was founded in 1931 when the first store opened its doors in Adderley Street,
Cape Town. Three years later, a second branch opened in Durban, with another two in Port
Elizabeth and Johannesburg a year later. The Woolworths founder, Max Sonnenberg,
believed that success lies in providing customers with superior-quality merchandise at
reasonable prices. This belief has been instrumental in establishing Woolworths as one of
South Africa’s leading retail chains.
Woolworths was among the first local retailers to offer employees a pension fund,
medical aid and maternity leave. It was also an early adopter of technology. A lease
agreement for the first computer was agreed to with National Cash Registers (NCR) in the
late 1960s, and Woolworths was already using a computerised merchandising system by the
early 1970s. In 1974, Woolworths became the first South African retailer to introduce sell-by
dates on food packaging. Woolworths was the first South African retailer to offer pre-washed
lettuce and machine-washable wool clothing to consumers. It was also one of the first local
retailers to remove as many artificial additives and preservatives as possible from food, and
it was instrumental in the successful planting of South Africa’s first commercial crop of
organically grown cotton. Woolworths was also the first major retailer to make its products
available in the 24-hour convenience retail market. By 2009, there were about 40
Woolworths Food Stops in Engen forecourts around the country and by 2018 this number
had risen to 74.
Today, Woolworths Holdings Limited is an investment holding company and one of the
top 40 companies listed on the Johannesburg Securities Exchange. Its core business focus
is the provision of retail (clothing, food, homeware and beauty) and financial services to
upper- and middle-income groups, mainly in South Africa but also in Africa, Australia and
New Zealand. It employs more than 44 500 employees across 14 countries, and trades in
over 1 400 store locations.
Throughout its 80-year history, Woolworths has grown, evolved and adapted to the
changing world, and the brand has remained true to its core values. The Woolworths values
state: customer obsessed, inspiration, responsible, collaborative and committed to quality.
Its vision is ‘to be one of the world’s most responsible retailers’, and the Woolworths mission
statement is: ‘We provide shared value through retail brands that meet the needs of
aspirational customers in the southern hemisphere’.
The WHL group consists of three operating subsidiaries, namely Woolworths Proprietary
Limited (Woolworths), Country Road Limited (Country Road Group) and David Jones Limited
(David Jones), which was acquired with effect from 1 August 2014. Woolworths Financial
Services Proprietary Limited (Woolworths Financial Services) is a joint venture with Absa
Group Limited, who has the controlling interest in Woolworths Financial Services.
The Group Chief Executive Officer is Ian Moir, who was appointed in November 2010.
He was appointed to the board of Country Road on 23 October 1998 and was formerly Chief
Operating Officer of the company before being appointed Chief Executive Officer in
November 2000. He was previously Executive Director and Chief Operating Officer of
Woolmark.
The group’s management believes that its long-term success depends on its ability to
implement the WHL Group’s strategy and on achieving its targets for each of its strategic
focus areas, namely:
•Build stronger, more profitable customer relationships;
•Offer customers a connected retail experience;
•Be a leading fashion retailer in the southern hemisphere;
•Become a big food business with a difference;
•Drive synergies and efficiencies across the group;
•Embed the good business journey throughout its business (in 2007, Woolworths
launched its Good Business Journey, which is a plan to make a difference in four key
areas, namely transformation, social development, the environment and climate change).
Their five headline goals for 2020 are:
•Contribute R3,5 billion to our communities;
•Save 500 billion litres of water;
•Halve our energy impact by 2020 and source all our energy from renewables by 2030;
•Responsible sourcing of all key commodities; and
•Have at least one sustainability attribute for all directly sourced products.
Sustainability is a key component of the Woolworths strategy and has eight focus areas,
namely ethical trade, sustainable farming, energy and climate change, water, waste, social
development, transformation and health and wellness.
Woolworths is the main partner of The MySchool MyVillage MyPlanet programme – one
of South Africa’s biggest community fundraising programmes. In 2017 Woolworths
customers raised R105 million for education through MySchool swipes. MySchool MyVillage
MyPlanet won three awards at the 2018 Loyalty Magazine Awards for the following
categories:
•Best CSR Initiative Linked to Loyalty
•Best Long-Term Loyalty Programme
•Regional Loyalty Champions of the Year for Middle East & Africa.
With regard to ethical trade, the Woolworths Holdings ethical trade positioning statement
indicates that they are committed to ensuring that both Woolworths Holdings Limited (WHL)
and their suppliers operate in a way that respects workers’ rights, maintains safe working
conditions, upholds local employment laws and protects the environment and the welfare of
animals. Their goal is to ensure that all of their packaging across their food and clothing
business is reusable or recyclable by 2022, and that they will eliminate the use of single-use
plastic bags by 2020. They are also in the process of removing single-use cutlery and straws
from their stores and cafés. All Woolworths suppliers are audited independently against food
safety and hygiene standards. With regard to ensuring an ethical supply chain, WHL
concentrate on the following:
•Policies: We expect our suppliers to share our vision and business codes of conduct.
Our code is underpinned by the ILO conventions and the ETI base code.
•Ethical audits: We’re a member of SEDEX, a transparency tool for ethical auditing. We
are working to convert our suppliers to SMETA or other globally recognised audit
protocols using the SEDEX data platform, but also continue to audit those who have not
yet made the switch against our own independently verified ethical audit protocols.
•Partnering: We partner with best-in-class organisations, standards, and certification
schemes to tackle complex and systemic issues to further strengthen our relationships
with our suppliers.
•Building capacity: Training our staff in human rights, ethics and responsible commodity
sourcing is key to driving progress.
Woolworths Holdings was included in the FTSE/JSE Responsible Investment Top 30 Index
for 2017/2018 and was included in the FTSE4Good Emerging Index Series for 2017/2018. It
has been included in the Dow Jones Sustainability Index for the seventh year in succession,
as well as on the Emerging Markets Sustainability Index. Woolworths Holdings also
maintained its Vigeo Eiris Best Emerging Markets Performers Ranking (the 100 most
advanced companies in Emerging Markets universe) as of June 2018 and was listed at #40
in Fortune’s Third Annual ‘Change the World’ List of Companies That Are Doing Well By
Doing Good.
Woolworths is one of 27 BRICS’ companies selected by The Boston Consulting Group
as part of its 2014 BCG Local Dynamos report. ‘Local dynamos’ are emerging-market firms
that have succeeded by staying home and beating both multinationals and local, often stateowned, companies. Woolworths was included for its uniquely ingrained sustainability
principles across the business. Woolworths is also investing in the latest technology. It has
recently launched its updated app on Android and iOS with new functions and more security
benefits. This resulted in a 166 per cent growth in app registrations for 2017. The app
provides customers with daily information on food and fashion and influences their on- and
offline buying behaviour.
Sources: Woolworths. n.d. Woolworths Holdings Ethical Trade Positioning Statement. Available
at https://www.woolworths.co.za/images/elasticera/New_Site/Corporate/responsible_sourcing_position_stat
ement.pdf.
[Accessed
14
September
2018]; Woolworths.
n.d.
Sustainability. Available
at https://www.woolworthsholdings.co.za/sustainability/our-good-business-journey/.
[Accessed
15
September
2018];
Woolworths.
n.d.
Key
sustainability
indicators.
Available
at https://www.woolworthsholdings.co.za/wp-content/uploads/2018/09/WHL_2018_Key_Sustainability_Indicators_And_Achievements.pdf. [Accessed 17 September 2018]; Woolworths. n.d. Report 2018.
Available
at https://www.woolworthsholdings.co.za/wpcontent/uploads/2018/09/WHL_2018_GBJ_Report_2018.pdf. [Accessed 17 September 2018]; Woolworths.
n.d. Purpose, vision and values. Available at https://www.woolworthsholdings.co.za/overview/our-purposevision-and-values/. [Accessed 17 September 2018]; Hillock, L. 2017. Woolworths forges ahead with digital
strategy. Available at http://www.bizcommunity.com/Article/196/182/170146.html. [Accessed 11 October
2018]; Woolworths Holdings Limited. 2018. 2018 Integrated Annual Report. Available
at https://www.woolworthsholdings.co.za/wp-content/uploads/2018/09/WHL-2018-Integrated-Report.pdf.
[Accessed
9
December
2018].
Woolworths.
n.d.
Our
history.
Available
at http://www.woolworths.co.za/store/fragments/corporate/corporate-index.jsp?content=../fiveways/fiveWays&contentId=cmp204261. [Accessed 9 April 2015]; Woolworths Holdings Limited. n.d.
Available at http://www.woolworthsholdings.co.za/default.asp. [Accessed 9 April 2015]; Woolworths
Holdings
Limited.
n.d.
WHL
Directorate.
Available
at http://www.woolworthsholdings.co.za/corporate/directorate.asp. [Accessed 10 April 2015]; Woolworths
Holdings
Limited.
2014. 2014
Integrated
Report.
Available
at http://www.woolworthsholdings.co.za/investor/annual_reports/ar2014/whl_2014_integrated_reprt1.pdf.
[Accessed 10 April 2015].
Management sets and keeps the operations of the business on a balanced
course. In the microenvironment – that is, within the business itself – a balance must be
maintained between the goals of the business, the resources it needs to realise those
objectives, the personal goals of the employees and the interests of the owners. Table
6.2 shows four basic kinds of resources found in organisations, namely human
resources, financial resources, physical resources such as equipment and raw materials
and information or knowledge resources. Management is necessary to combine and
direct the resources of different organisations so that each can achieve its goals as
efficiently or productively as possible. To Vodacom, the primary goal may be to increase
market share and the number of customers. Sasol’s primary goal may be a certain profit
margin or return on investment, while the management of the University of South Africa
will see its goals as improving its teaching through more student support, and better
research and service to the community. The management of the City of Tshwane may
have as its goal making Pretoria a safer and cleaner city, while the owner–manager of a
small bed-and-breakfast establishment may be in business to maintain a standard of
living for his or her family. For these goals to be reached, management has to strike a
proper balance between resources, interests and goals.
Table 6.2: The basic resources used by an organisation
Typical management tasks
•Who determines where Cell C should next set up cellphone towers in South Africa to
ensure widespread cellphone reception for its customers? Management.
•Who decides where the next Nedbank branch will be established? Management.
•In a modest restaurant, who sees that there are adequate funds, equipment, raw
materials and staff available to perform the various functions? Management, even if the
manager is also the owner of the business.
•Who decides whether Safair will increase the number of its flights to George?
Management.
Management keeps the organisation in equilibrium with its environment. On
the one hand, management adapts the organisation to environmental change, for
example by aligning its employment policy with the requirements of the Employment
Equity Act (No. 55 of 1998) or increasing advertising in African languages to
communicate with the increased number of black consumers in the market. Recall the
case study at the start of this chapter: Woolworths launched its updated app on Android
and iOS which provides customers with daily information on food and fashion.
On the other hand, management may try to achieve a better equilibrium with the
environment by trying to change the environment itself, in an attempt to reach the
organisation’s objectives. Developments in the cell phone industry by Vodacom and
other cellphone companies regarding the use of mobile applications to send money
instead of using cash, has proven successful across many African countries due to both
safety and convenience factors.1
Management is necessary to reach the goals of the organisation at the highest
possible level of productivity. In Chapter 1, we indicated that the economic principle,
namely to ensure the greatest possible output with the least possible input, is the
reason for the existence of business management.
Thus far, we have shown that management is an indispensable component of the
successful functioning of an organisation, especially the business organisation. In the
following sections, we shall provide a more comprehensive overview of the task of
management.
6.3A definition of management
Management is defined, quite simply, as the process followed by managers to
accomplish a business’s goals and objectives. More precisely, management is a process
of activities that are carried out to enable a business to accomplish its goals by
employing human, financial and physical resources for that purpose. Much has been
said about the goals and resources of a business, and the fact that management directs
the resources to reach the goals. But how does this process manifest itself? Which form
and sequence does the process or activities assume for the accomplishment of business
goals?
Although there is general agreement that management is necessary to direct a
business toward its goals, the many definitions offered in the literature on management
demonstrate the wide differences of opinion among writers and experts about exactly
what the activities of management should be. Most experts, however, single out four
fundamental activities as the most important tasks of the management process.
Management does four things: it decides what has to be done; it
decides how this should be done; it orders that it be done; and, finally, it checks that its
orders have been carried out. As we have noted, the management terms used to define
these fundamental tasks are planning, organising, leading and control. These are the
basic tasks of a manager, and they are linked in the sequence shown in Figure 6.1. It
would not make sense to perform them in any other sequence, for managers cannot
decide to do something unless they know what should be done; they cannot order a task
to be done until they have decided how it should be done; and they cannot check the
results before the orders have been given.
Figure 6.1: Basic functions of management
It should be clear at this stage that the fundamental management activities and the
resources of a business, as well as its goals, should not be viewed as separate entities,
but rather as an integrated process that has to do with the following: planning the goals
and the resources to accomplish them, organising the resources and people, leading the
people, and, lastly, controlling the resources and the activities of the people.
Figure 6.2 shows management as an integrated process.
Figure 6.2: The four fundamental functions represented as a process
The following brief description of the fundamental management functions elucidates
the concept of management and the management process:
•Planning determines the mission and goals of the business, including the ways in
which the goals are to be reached in the long term, and the resources needed for this
task. It includes determining the future position of the business, and guidelines or
plans on how that position is to be reached.
•Organising is the second step in the management process. After goals and plans
have been determined, the human, financial and physical resources of the business
have to be allocated by management to the relevant departments or persons, duties
must be defined, and procedures fixed, to enable the business to reach its goals.
Organising therefore includes developing a framework or organisational structure
to indicate how people, equipment and materials should be employed to reach the
predetermined goals. Because the goals and resources of different businesses differ
greatly, it makes sense that each must have an organisational structure suited to its
own peculiar needs.
•Leading entails directing the human resources of the business and motivating
them. Leaders align the actions of employees with the predetermined goals and
plans. The part played by leadership in getting and keeping things going in
motivating and influencing staff through good communication and relations
between management and staff, and among staff, has a decisive effect on the culture
prevailing in a business. Managers do not only give orders. As leaders they
collaborate with their superiors, equals and employees who report to them, as well
as with individuals and groups to reach the goals of the business.
•Control means that managers should constantly establish whether the business is
on a proper course towards the accomplishment of its goals. At the same time,
control forces management to ensure that activities and performance conform to the
plans for reaching predetermined goals. Control also enables management to detect
any deviations from the plans and to correct them. It also obliges management
constantly to reconsider its goals and plans.
Figure 6.2 illustrates the management process as a logical sequence of actions. It is,
important, however, to realise that the functions of management do not occur in a tidy,
step-by-step order. Managers do not plan on a Monday, organise on a Tuesday, lead on a
Wednesday and control on a Friday. At any given time, a manager is likely to be engaged
in several management activities simultaneously.
Critical thinking
How do the management functions of planning, organising, leading and controlling take
place in practice? Consider the following information about Sam Dlamini and advise Sam on
planning, organising, leading and controlling.
Sam Dlamini completed his BCom degree in Business Management at Unisa and was
working for a retail store in the hardware department. He was frustrated because his
supervisor told him that his degree would not be of any advantage since there were no
management positions open to which he could be promoted. Moreover, he had been in his
position for eight years.
So, when Sam’s uncle, Jeffrey, asked him to come and help him build up the very
successful small printing company he had started three years earlier, Sam was interested.
His uncle told him that since Peter (his manager) had died the previous year, it had become
very difficult for him to keep the staff together and to process the many orders they received
for printing. Despite the demand for their quality products at a very reasonable price, his
uncle was unable to keep things running as smoothly as before.
Sam accepted the position of manager and joined the business. Sam found the business
in disarray: no one knew which objectives to achieve, who to turn to for advice and authority,
which quantities to deliver, or which standards to adhere to. He observed that they were not
planning what needed to be done, that resource allocation was haphazard, that no one was
taking on leadership, and that there was virtually no control over any activities. He decided
that the most important problem was the lack of a proper management process, and that
such a process should be implemented immediately.
The management process and the four functions that it comprises are encountered
at all levels and in all departments of the business. These will now be examined more
closely.
6.4The different levels and functional areas of
management in businesses
Managers are found not only at the top of a business hierarchy, but at all its levels.
Thus, each manager is in charge of a number of managers under him or her. They, in
turn, are in charge of a number of employees who report directly to them. A business
also has different types of managers, each responsible for the management of a more or
less specialised group of activities. Figure 6.3 indicates the integrated management
process.
6.4.1The different levels of management
As shown in Figure 6.3, several levels of management may be identified. For the sake
of convenience and ease of explanation, however, only three levels – namely, top, middle
and lower management – are represented.
Top management comprises the relatively small group of executives who control
the business and in whom the final authority and responsibility for the execution of the
management process rests – for example, the board of directors, the partners, the
managing director and the chief executive – as well as any management committees
consisting mainly of members of top management. Top management is normally
responsible for the business as a whole and for determining its mission and goals. It is
concerned mainly with long-term planning, with organising insofar as the broad
business structure is concerned, and with providing leadership and controlling the
business by means of reports and audits. Top management also monitors the
environment within which the organisation operates. At the Vodacom Group, for
example, top management consists of the board of directors as well as Shameel Joosub
(Group CEO), the Chief Financial Officer (CFO), the Chief Operating Officer (COO) and so
forth. In a government department, top management typically consists of the minister,
the director-general and the deputy directors-general.
Middle management is responsible for certain functional areas of the business and
is primarily accountable for executing the policies, plans and strategies determined by
top management. Normally, middle management consists of functional heads, such as
the marketing manager, the purchasing manager, the human resource manager, and so
on. Middle management is therefore responsible for medium- and long-term planning
and organising within its own functional areas, as well as for control of its management
activities. It should, at all times, also monitor environmental influences that may affect
its sphere of operations.
Lower management, also referred to as supervisory management, is responsible
for still smaller segments of the business, for example the various subsections that form
part of a department. For instance, the marketing department may have a product
manager, a promotions manager or a sales manager for certain areas. Supervisors and
foremen/women are included in lower management. Their duties mainly involve the
day-to-day activities and tasks of a particular section, short-term planning, and
implementing the plans of middle management. Lower management supervises the
finer details of organising, such as allocating tasks on a daily basis. These managers
guide staff in their own subsections and keep close control over their activities. Lower
management is often called line management; it is the first management level to which
employees from operational ranks are promoted. They then devote most of their time to
supervising those employees who report to them.
For the sake of simplicity and convenience, we have distinguished only three levels
of management, but in practice the number of levels is determined largely, though not
exclusively, by the size of the organisation. The main reason for this is a limit on the
number of people whom one person can manage effectively. Peter’s Shoe Repairs, a oneperson business, for example, has only one level of management, in which the functions
of upper, middle and lower management are combined in the person of the owner. A
very large business like Edcon, employing thousands of workers, may well comprise
many more than three levels.
In Chapter 8, we discuss this question further in our examination of organisational
structures.
Figure 6.3: Different levels or types of management in a business or organisation
6.4.2The functional management areas in a business
organisation
Figure 6.3 shows the different levels of management and the different types, or
functional areas, of management that may be distinguished, irrespective of level.
Functional management refers to specialised managers who are necessary for the
different functions of the business. Functional managers are responsible for only the
specified management activities of their functions or departments.
Marketing management, for example, is responsible for the following:
•Planning the activities of the marketing department. This means that
marketing objectives, for example a 10 per cent increase in market share by 2022,
are carried out in accordance with the goals and objectives of the business as a
whole, and plans are devised to reach those goals.
•Organising marketing activities. An example is the allocation of tasks to persons
so that certain objectives can be attained.
•Assumption of leadership of marketing activities. This entails motivating and
giving orders to marketing staff in order to accomplish the goals and objectives and,
if necessary, providing guidelines.
•Controlling marketing activities. An example is measuring the results and costs
of a campaign against its objectives.
In the same way, financial management, human resource management, logistics
management, and other functional managements plan, organise, lead and control their
departments. Many organisational functions may be identified, depending on the
required number of specialist areas that a business may need. In practice, the number
and importance of these specialised areas vary from business to business. There is,
however, only one organisational function – general management – that is universally
encountered, and that has a definite part to play in every organisation. Some examples
of management levels are given in the box below.
Management levels: Some examples
•Sasol has 10 management levels.
•The University of South Africa has approximately eight management levels and some 5
230 employees.
•Small business ventures such as bedand-breakfast establishments typically have one
level of management.
6.4.3The function of general management
One function not shown vertically in Figure 6.3, but that is nevertheless identified as a
separate function in the literature and occurs in every business, is general
management. General management differs from other specialised functions in that it
integrates all the others. It deals particularly with the activities of top management,
while at the same time manifesting itself in other functions, as in the case of marketing
management. General management is therefore the overriding function that controls
the management process and the general principles of management as applied by top
management.
The same elements of the management process and the general principles of
management also affect the other functions, however. This means that all managers in
the business should have a thorough knowledge of the management process and its
general principles in order to be able to manage their own specialised functions more
efficiently. For this reason, general management is discussed as an introduction to the
other functions in this chapter, and again in Chapters 7, 8, 9 and 10.
This question may justifiably be asked: ‘Is there any difference between business
management (discussed in Chapter 3) as a subject of study and the management
process?’ The answer is, decidedly, yes. Business management is the science that
examines all the things that affect the productive and profitable operations of a
business. It considers not only the management process, but also the external
environmental factors that can influence it, as well as the specialised management areas
and various disciplines and techniques. In contrast, the study of the actual management
process of a business is only one component of business management. It examines only
the management process and the general management principles that enable the
business to accomplish its goals and objectives as effectively as possible.
We have described the management process, the levels of management, the
functions in which the management process takes place, and the unique position and
nature of general management. The skills required of managers in executing the
management process, and the roles they play in the business, will now be considered in
greater detail.
6.5Skills needed at different managerial levels
Although management is found at all levels and in all functions of a business, the
personal skills needed to do the job differ at each level. Figure 6.4 depicts the different
skills.
The skills and abilities necessary for top management to carry out the functions of
general management are different from those required by lower management. Three
key skills are identified as prerequisites for sound management:2
1.Conceptual skills, that is, the mental capacity to view the business and its parts
in a holistic manner. Conceptual skills involve the manager’s thinking and planning
abilities.
2.Interpersonal skills are also called human relations skills and refer to the ability
to work with people. These skills help managers to understand and communicate
with people and to lead, motivate and develop team spirit.
Figure 6.4: The skills needed at various managerial levels
3.Technical skills, that is, the ability to use the knowledge or techniques of a
particular discipline. Knowledge of accountancy or engineering or economics is an
example of a technical skill that is required to perform a specified task. Managers at
lower levels, in particular, should have sufficient knowledge of the technical
activities they have to supervise. However, the time spent on technical activities
decreases as managers move up the managerial ladder, where conceptual and
analytical skills assume more importance.
Where do managers acquire these skills? One source is management education at
schools, universities of technology and universities. Some businesses also provide their
own management training. Worldwide there is currently a strong tendency to consider
formal academic education in management as a prerequisite for success in business.
Another source of managerial competence is practical experience. A natural aptitude
for management, as well as self-motivation and ambition, plays a considerable part in
the development of managerial skills.
Critical thinking
What type of skills do South African managers have? How do their educational backgrounds
and experience relate to the three key skills required for sound management?
•The CEO of Vodacom Group (Pty) Ltd, Shameel Joosub, holds a Bachelor of
Accounting Science (Honours) from the University of South Africa and a Master of
Business Administration degree from the University of Southern Queensland.
•Entrepreneur Patrice Motsepe, law graduate and attorney, established the mining
company ARMgold in 1997. He currently serves as executive chairman to ARM and also
sits on the board of Sanlam.
•Lesetja Kganyago, Governor of the South African Reserve Bank since November 2014,
has a Bachelor of Commerce degree and Masters degree in Economics. He has also
served as Director-General for the National Treasury and was the Deputy Governor of
the SA Reserve Bank.
•Thando Mkatshana , CEO of ARMplatinum since 2017, has a National Higher Diploma
(Coal mining) from the Technikon Witwatersrand, a BSc Engineering (Mining) from Wits
University, Management Development Program and Master of Business Administration
(MBA), both from the University of Stellenbosch.
•Maria Ramos, ex-CEO of Absa Group Limited, holds a banking diploma, a BCom
Honours degree, and an MSc degree in Economics.
•Trevor Manuel is a former South African Minister in the Presidency for National Planning
Commission. He has been the Chairman of the Board of Governors of the International
Monetary Fund since 2002, has completed a National Diploma in Civil and Structural
Engineering and an executive management programme and holds no less than seven
honorary doctoral degrees in commerce, technology, economics and law.
•Nancy Naidoo, the Human Resource Manager at a medium-sized advertising firm, holds
a BCom Honours degree in Human Resource Management.
•Kgomotso Sedibe is a schoolteacher who started her own venture in 2003, a bed-andbreakfast establishment with three rooms. She has completed two management
certificate courses and enrolled for a BCom in Hotel and Tourism Management last year.
6.6The role of managers
Every manager must fulfil a specified role, irrespective of the managerial level or area
he or she occupies. A manager, after all, performs certain functions, meets certain needs
and assumes certain responsibilities for the business.
As Figure 6.5 shows, the roles of managers can be placed in three overlapping
groups, namely interpersonal, information and decision-making roles: Three groups of
activities constitute the interpersonal role of managers:
•Acting as the representative figure who attends charity dinners, meets visitors,
attends a colleague’s wedding, or opens a new factory.
•Leading in the appointment, training, performance, promotion, and motivation of
employees.
•Maintaining good relations within the organisation and with its public (this role
can occupy up to 50 per cent of a manager’s time): internal relations involve other
managers and individuals; external relations involve suppliers, banks customers,
and so on.
The information role enables managers to obtain information from colleagues,
employees who report to them, superiors and people outside the business, to help them
make decisions. This role focuses on monitoring or gathering information about change,
opportunities or threats that may affect their department. Managers analyse this
information and pass relevant data on to colleagues, superiors and employees who
report to them. In this way, they constitute an important link in the business’s
communication process. The information role also demands that managers act as
spokespeople in their departments or businesses, both internally as well as with the
outside world.
The decision-making role involves the gathering and analysis of information. In
this respect, managers may be regarded as entrepreneurs who use the information at
their disposal to achieve positive change in the form of a new product or idea, or the
restructuring of their business. Woolworth’s management, for example, decided to
acquire David Jones based on research reports. Managers also have to deal with and
solve problems such as strikes, shortages and equipment breakdowns. Managers have
to decide how to allocate the resources of the business. These include funds, human
resources and equipment, and the allocation of these is often a critical management
decision. In their role as negotiators, managers regularly interact with individuals, other
departments or businesses to negotiate goals, performance standards, resources and
trade union agreements.
Figure 6.5: The overlapping roles of managers
By viewing managers from a perspective of the different roles they play in a business
organisation we gain insight into the manager’s task. This is important for the following
reasons:3
•The concept of a manager’s role creates an awareness of what a manager does,
and hence which skills are required.
•A manager’s seniority in the business largely determines his or her role, and how
much time is spent on each activity.
•The concept of role distribution explains why managers cannot systematically
move from planning to organising to leading and, eventually, to control. The
complexity and turbulence of their environment requires a more flexible approach.
The above discussion regarding the management skills required for different
management activities, and the role of managers, aims to explain how management
works, and should not be viewed as an exact exposition of a management process,
because the variables differ from one business to the next. In addition, the four
management functions are supplemented by various other activities that also have to be
performed by management, again depending on the nature of the business. Besides a
knowledge of, and skills in the four fundamental management elements, management
also requires a basic knowledge of supporting management activities.
Although many activities may be identified, four main supplementary or supporting
management activities are normally distinguished, namely:
•gathering and processing of information to make decisions possible;
•decision-making;
•communication; and
•negotiation.
These supplementary activities are not grouped under any of the four management
functions because they occur in each element – for example, information is necessary
not only for planning but also for organising, and even more so for control. Similarly,
management communicates while planning and organising. Communication is an
essential component of leadership. In Chapter 9, these activities are examined in greater
depth.
The nature of management may further be explained by examining the evolution of
management thought over the past few decades. This will also help to explain the
present status of management and the approach followed in this book.
Table 6.3: The development of management theory
State of management until early
1900s
State of management during 20th
century
The 21st century: What w
management be?
A few large organisations, but no
mega-organisations
Many huge and powerful organisations in
both the private and public sectors
Emphasis on corporate gover
corporate social responsibility
Comparatively few managers – no
middle management
Many managers – a comparatively large
middle management group
Influence of rise of emerging
China on development of man
Managerial activities not clearly
distinguished from activities of owners
Well-defined managerial activities clearly
separated from non-managerial activities
Succession to top management
based primarily on birth
Promotion to top management on a basis of
qualifications, competence and performance
Few decision-makers
Many decision-makers
Emphasis on command and intuition
Emphasis on leadership, teamwork and
rationality
6.7The development of management theory
Because management experience and knowledge of the past are important both to
present and future management success, it is necessary to provide a brief overview of
the development of management theory over the 20th century. In Chapter 1, we briefly
outlined the development of business management as a science. The emphasis there
was mainly on business management in past centuries, when the entrepreneur both
owned and managed his or her business. In contrast to this, the 20th century saw the
emergence of the professional manager paid by the owners to manage the business. The
manager’s level of remuneration often depends on his or her success in managing the
business profitably. Table 6.3 gives an exposition of the state of management in
previous centuries as opposed to management in the 20th century. It also raises some
questions as to the future state of management in the 21st century.
The concept of the professional manager resulted in, among other things, a number
of theories or approaches to management. Management scholars as well as practitioners
researched management issues, postulated theories about how best to manage a
business organisation and published their theories or approaches to management.
Although professional management as we know it today is a product of the 20th
century, during its early years there was much uncertainty about what the activities and
elements of management actually were. It was only in 1911, with the publication of F.W.
Taylor’s Principles of scientific management, that management was at last placed on a
scientific footing.4 Since then, theories and approaches to management have developed
unevenly, with a good deal of overlapping at times. This fitful progress is no doubt
attributable to the uneven development of such supplementary disciplines as
psychology, sociology and mathematics. With each wave of development in these
subjects, new developments and theories in management evolved, which were in turn
followed by more knowledge about the factors that determine the success of a business.
At the same time, changes in the business environment resulted in the development of
new perspectives on existing management theories.
Most of the approaches to management in the literature of even the recent past
reveal a great deal of diversity and overlapping of the views of writers and scholars
about what can properly be regarded as managerial activities. The inadequacy of
academic research during the formative years of management has, in recent decades,
been amply compensated for by an abundance of research and literature. Scholars are
all too ready to put forward a wide range of opinions about management. Behaviourists,
for example, inspired by the human relations approach of the 1930s, see management
as a complex system of interpersonal relations, and psychology as the basis of
management theory. Others, again, see sociology as the basis. Some maintain that the
essence of management is decision-making, with mathematics playing a central role,
while others argue that accounting should be the basis of all management principles and
theories. The different viewpoints and approaches towards a theory of management are
a reflection of the political, economic, social, technological and environmental issues of
the time.
It is often asked whether the various theories and viewpoints of the past have any
relevance for the contemporary organisation. Among the many theories about how to
improve the performance of the organisation, some aspects of each have survived and,
indeed, contributed to contemporary theories on management. In this way, the legacy of
past successes and failures becomes part of present and future management
approaches. A brief examination of the different theories of management is therefore
necessary.
6.7.1The main schools of thought on management
The existing body of knowledge on management theory or management approaches has
emerged from a combination of ongoing research on management issues and the
practical experience of certain scholars of management. The management theories that
have evolved over many decades are grouped into a number of schools of thought. Each
school believed at some stage that it had found the key to management success in terms
of productivity and profitability. Later assessments of the various approaches to
management, however, demonstrated that these so-called answers to the problems of
management were at best only partially correct. Yet, each has made some contribution
to the theoretical body of knowledge on management. The theories of management can
be classified into two main schools of thought, namely:
1.The classical approaches (±1910–1950)
2.The contemporary approaches (±1960 to the present).
Figure 6.6 illustrates the development path of management theory.
The classical approaches are discussed below.
Figure 6.6: The evolution of management theory
6.7.1.1The scientific school
The contribution of the scientific school is especially associated with the work of F.W.
Taylor (1856–1915). He was an engineer at a steelwork in Philadelphia and believed
that a scientific approach to any task would greatly increase the productivity with which
it was carried out. Through the scientific application of observation, job analysis, job
measurement, the redesign of jobs, and financial incentives (by paying workers
according to their output), he and his colleagues proved that the productivity of a
business could indeed be increased.
Although research was confined to workers and lower management levels, this
school made a valuable conceptual contribution in that managers and academics
became convinced that scientific approaches and methods could be applied in
productive ways to attain the goals of an organisation.
6.7.1.2The management process school
The management process school, by contrast, concentrated on top management. Its
method was to identify the most important functions in a business and the most
important elements of management, so that universal principles of management could
be developed for each function and element. The theory was that the application of
universal management principles would take any business towards its goals.
Henri Fayol (1841–1925) was the originator of this approach. His personal
contribution included the identification of six functions of a business:
1.The technical (production-operational management) function
2.The commercial function (purchasing and marketing)
3.The financial function
4.An accountancy function
5.A security function (protection of property)
6.The function of general management.
This functional approach, albeit in a modified form, still receives wide support and
offers the following advantages:
•It systematises the great variety of activities and problems in a business.
•It facilitates the internal organisation of a business by classifying activities into
departments according to their functions.
•It facilitates management by making it possible to appoint people with the right
qualifications to the various functional departments.
•It makes the study of management science considerably easier by grouping similar
problems. (This book, for example, is classified functionally.)
Fayol also identified the following fundamental elements of the management process:
planning, organising, leading, co-ordinating and control. This description of the
management process is still accepted today.
6.7.1.3The human relations or behavioural school
The human relations or behavioural school came into being because of the failure of
the scientific and classical management process schools to make an adequate study of
the human element as an important factor in the effective accomplishment of the goals
and objectives of a business. Elton Mayo (1880–1949) found that increased productivity
was not always attributable, as the scientific school believed, to a well-designed task
and sufficiently high wages. It could also be attributed to such factors as the relationship
between people in the business – between management and workers, and between
workers themselves in a particular group.
The basic premise of this school is that psychological and sociological factors are no
less important than physical factors in the attainment of the goals of a business.
Research into social interaction, motivation, power relations, organisational design
and communications forms the basis for the contributions by this school, which are
particularly valuable in the area of personnel management.
6.7.1.4The quantitative school
The quantitative school sees management primarily as a system of mathematical
models and processes. It is largely composed of operational researchers or decision
experts who believe that if management or any elements of it are at all a logical process,
then this should be expressible as mathematical relations.
The contribution of this school, particularly in the development of models for the
running of complex processes, is important. However, this school should be regarded as
an aid to management rather than as a separate school of management theory.
6.7.1.5The systems approach
The systems approach to management developed in the 1950s. This approach
compensated for the main limitations of the previous approaches. These limitations
were, firstly, that they ignored the relationship between the organisation and its
external environment, and secondly, that they focused on only one aspect of the
organisation at the expense of other areas. Some managers would, for example, focus
only on financial aspects and neglect the organisation’s market and customers. To
overcome these shortcomings, management scholars developed the systems theory,
which views the organisation as a group of interrelated parts with a single purpose,
where the actions of one part influence the other parts.
Managers cannot, therefore, manage the separate parts independently, but should
rather manage them as an integrated whole. This approach was the forerunner of the
concept of strategic management.
6.7.2Some contemporary approaches to management
During the second half of the 20th century, the environment in which business
organisations operated began to change at an increasing rate, as explained in Chapter 4.
Because of the rapidly changing environment, new issues and challenges emerged and
so, too, did new approaches to management. The contemporary schools of thought were
ushered in by the concept of strategic management, followed by a number of
contemporary approaches, which we outline below.
6.7.2.1The contingency approach
The contingency approach seeks to eliminate the defects of other theories. Like the
systems approach, it attempts to integrate the ideas of the different schools. The basic
premise of the contingency approach is that the application of management principles
depends essentially on a particular situation confronting management at a particular
moment. In a given situation, management will decide to apply the principles of the
functional, quantitative or behaviourist school, or combinations of these. In other
words, the contingency approach attempts to adapt the available techniques and
principles provided by the various management approaches to a given situation, so as to
reach the objectives of the business as productively as possible. It may be said that this
approach does not really recognise the existence of universal principles of management,
but instead concentrates on whatever means are available to solve problems.
6.7.2.2Strategic management
Strategic management as an approach to organisational success evolved from the
turbulent environments of the 1960s and 1970s. The pace of technological change,
the emergence of Japan and other new post-World War II economies, and demographic
change, as well as other political and social trends, forced management to align the goals
and objectives of their organisations with trends in the business environment. By
focusing on the threats and opportunities in the environment, and evaluating its
strengths and weaknesses in order to overcome the threats and exploit the
opportunities, the organisation builds a distinct competence in a particular market.
During the early years of the strategic management approach, large organisations
had to make big strategic planning decisions. Since the 1980s, however, many of these
decisions have been abandoned because today every manager in the organisation is
required to think and act strategically. Today, businesses involve managers from all
levels of the organisation in the strategic planning process.
6.7.2.3Total quality management
Total quality management (TQM) is one of the contemporary management
approaches that evolved during the late 1980s and the 1990s and revolves around the
matter of quality. American managers examined the success of their German and
Japanese counterparts in the American market, and found that the latter were obsessed
with quality. What further inspired management scholars was the fact that Japanese and
German managers not only delivered top-quality products and services, but did so at a
higher rate of productivity.
6.7.2.4The learning organisation and the reengineering of businesses
The management theories that evolved in the 1990s relate to the concepts of the
learning organisation and the re-engineering of businesses.
•The learning organisation is a management approach that requires learning
individuals. The inability to learn can cripple an organisation.
•Re-engineering is a management approach that forces the organisation to focus on
its core business and to outsource those activities that do not relate to the core
business. Since the 1990s, most organisations have reduced the size of their
workforces by outsourcing activities such as the company cafeteria, garden services,
maintenance, and a host of activities that are unrelated to the organisation’s core
business. Telkom reduced its workforce from 67 000 employees in the early 1990s
to approximately 28 000 by 2007. In January 2015, Telkom employed approximately
18 384 employees. In 2017 this number was 18 847. Telkom’s workforce is,
however, about 30 per cent bigger than those of its peers. Its planned 4 000-plus job
cuts met with strong union opposition and three unions challenged Telkom’s plans
in court, saying they were not consulted adequately.5
6.7.2.5Diversity management
Diversity management is another important challenge in contemporary management.
In South Africa, the management of diversity is partly enforced by the Employment
Equity Act (No. 55 of 1998). Management in Africa will, in due course, develop a
management approach with a body of knowledge that is peculiar to the needs and
cultural diversity of the continent.
Contemporary business issues that could shape management theory in the 21st
century include corporate governance, corporate social responsibility (also
referred to as corporate citizenship) and knowledge management. Corporate social
responsibility was discussed in Chapter 5. Management approaches and theories are
important instruments for broadening knowledge about management. The student of
management will, accordingly, be equipped to take a critical view of new ideas and new
approaches to management.
Ubuntu: an African perspective
The upbringing and socialisation of individuals in African society have always emphasised
interpersonal, informational and decision-making roles. Interpersonal roles are subsumed in
the notion of ubuntu in Zulu and Xhosa, unhu in Shona, botho in Tswana, broederbond in
Afrikaans, bunhu in Tsonga, vhuthu in Venda, and brotherhood in English. Thus, ubuntu is a
literal translation of the notion of collective personhood and collective morality. Ubuntu is
defined as ‘humanity to others’ and ‘I am what I am because of who you are’. It is at the core
of doing business in Africa. It can establish progressive business partnerships and
organisational activities and strategies that encourage the economic growth of African
communities.
Therefore, a leader (mutugamir in Shona, and umukhokheli in Zulu) guided by
the ubuntu philosophy is expected to inform and communicate with his or her own group and
to be its mouthpiece in external communication. Decision-making is the hallmark of
leadership, which involves analysis of the situation at hand, in consultation with others, and
guiding the process until a course of action is selected.
Sources: Choeu, C. 2016. Ubuntu Is at the core of doing business in Africa. Available
at https://www.communication-director.com/issues/ubuntu-core-doing-business-africa#.W78Pc2gzY2w.
[Accessed 11 October 2018]; Mbigi, L. 1997. Ubuntu: The African dream in management. Randburg:
Knowledge Resources; Moyo, R. 2015. Ubuntu, Applying the African Cultural Concept to Business.
Available
at https://www.africanexponent.com/post/ubuntu-applying-the-african-cultural-concept-tobusiness-75. [Accessed 11 October 2018].
The Impact of the Fourth Industrial Revolution on business
The work environment is changing. Technological advancements have had a major influence
on these changes. Some of these changes are listed below:
1.Communication has improved because of technological inventions such as smart
phones, tablets and social networking. Communication among management members,
from management to employees or among employees has become faster, immediate,
collaborative and unified.
2.Enabling of remote working. Employees can now work anywhere with a WiFi signal
and can be available at a moment’s notice.
3.Cloud computing has enabled businesses to move some of their operations to thirdparty servers which are accessible via the Internet. This has the advantages of variable
data packages as well as fast expansion and mobility without fearing downtime,
crashes or lost data.
4.Technology is keeping businesses organised. Businesses use systems such as
Project Management Software to assist in the planning, delegating, reviewing and
assessing of tasks. It is easier to supervise activities, and everything can be kept on
track. It helps to improve the responsibility, accountability, efficiency and timely delivery
of tasks assigned to employees.
5.Advanced technology aids in better customer segmentation. By using analytical
services and systems, the market can be segmented into more specific groups and
targeted directly. Google accounts can inform a business about the location of visitors
to the site, the type of browser used, how they found the website, how long they stay,
and at which point they leave.
6.Technology is improving the productivity and performance of businesses. They make
use of business productivity software which helps managers to track progress during
each phase of a project and offer instant reinforcement or coaching to keep
performance and deadlines on track.
7.Costs can decrease because of the implementation of innovative technological
software which helps to manage costs at different levels and improve profitability.
8.Businesses make use of security software which enables accessibility of sensitive
information to the right employees and prevents malicious hacking attempts. It also
helps to reduce the threat of data thefts and leaks.
Sources: Eight ways technology is changing business. n.d. Available at https://gomodus.com/eight-waystechnology-changing-business/. [Accessed 8 October 2018]; 10 Ways technology has reshaped the
modern workplace. 2017. Available at https://www.quickfms.com/blog/6-ways-technology-has-reshapedthe-workplace/. [Accessed 9 October 2018].
6.7.3Conclusion
The above examination of how management theory has evolved and contributed to the
broader body of knowledge on management clearly shows that there is no single
uniform and consistent theory of management that may be universally accepted and
applied. However, understanding the historical context provides us with a broad
perspective on the vastness of the body of knowledge, particularly with regard to the
research, principles, problems and approaches to management, on which managers can
draw.
We have adopted the process paradigm in this chapter because it offers a conceptual
framework for the study of management, it simplifies the subject, and it favours the
development of a universal theory of management.
6.8Summary
This is the first of five chapters dealing with general principles of management. We have
learnt that management is an indispensable component of any organisation, without
which the organisation’s resources cannot be properly utilised to reach its goals and
objectives. In addition, we have defined management as a process that consists of four
fundamental elements or management functions: planning, organising, leading and
controlling.
Management – that is, the functions of planning, organising, leading and controlling
– also represents a distinct function, namely general management, which, at the top
level, predominates, and also co-ordinates other management areas. At middle- and
lower-management levels, the management process is evident in every business
function. Each level of management requires certain skills, and the roles played by
managers differ from one level to the next.
Our examination of the evolution of management theory and the various approaches
to it has shown how the different schools of thought have contributed to the vast body
of management knowledge. The process approach, which distinguishes four tasks of
management and seven functions within a business, forms the basis of this book. In the
next four chapters, the various elements of the management process will be examined
more closely.
Small business perspective
As in the case of large organisations, the four management principles also impact on the
success of the small business enterprise. In many small businesses, however, the formal
planning process does not take place, and a lot of the planning is done informally. The
advantage of compiling a formal business plan for a small business owner is that it allows
him or her to evaluate quickly how unexpected opportunities could be of benefit to the
business. Small business owners will also require a business plan in order to apply for
finance from banks or other financial institutions. Where organising in the small business is
concerned, the owner is usually involved in all the business tasks and areas and all the
employees usually report to the owner, thus making it a very simple organisational structure.
Good leadership in a small business is essential and, just as in large organisations,
employees also need someone to look up to and who can motivate and inspire them to do
their best. A problem in small businesses, however, is that small business owners or
managers do not easily delegate authority, which can impact negatively on the growth of the
business. Control in the small business is usually handled by the small business owner or
manager personally. It is required to ensure that the business is profitable and that it
survives and prospers. The small business owner should, for instance, have a budget in
place that will warn him or her when the business is approaching its financial limits.
KEY TERMS
conceptual skills
lower management
contemporary approach
management
contingency approach
management principles
controlling
management process
corporate governance and citizenship
management theory
decision-making role
marketing management
diversity management
middle management
financial management
organising
financial resources
physical resources
Fourth Industrial Revolution
planning
functional management
quantitative school
human relations or behavioural school
re-engineering of a business
human resource management
resources
human resources
school
information resources
scientific school
information role
strategic management approach
interpersonal role
systems approach to management
interpersonal skills
technical skills
leading
top management
learning organisation
Total quality management approach
levels of management
types of management
logistics management
Questions for discussion
Reread the ‘Management in action’ case study at the beginning of the chapter and
answer the following questions:
1.What are the core values of Woolworths?
2.Woolworths’ management should direct the business towards its goals. What are
the key strategic goals of the organisation?
3.Which skills should Ian Moir have as CEO of Woolworths?
4.Which roles do the managers at Woolworths play? How do these roles differ from
management level to management level?
5.How does Woolworths ensure ethical business practice?
Multiple-choice questions
1.Identify the most dominant cause of business failure.
a.Managerial incompetence
b.Lack of leadership
c.Excessive competition
d.Lack of managerial experience
2.The theory or approach to management that attempts to adapt the available
techniques and principles provided by the various management approaches to a
given situation to reach the objectives of the business as productively as possible is
known as:
a.theory Z.
b.the systems approach.
c.the contingency approach.
d.the excellence movement.
3.Which one of the following activities constitute the interpersonal role of
managers?
a.The gathering and analysis of information.
b.Leading in the appointment, training, performance, promotion, and
motivation of employees.
c.Allocating the resources of an organisation.
d.Analysing information and passing data onto colleagues.
4.______________is a process of activities that are carried out to enable a business to
accomplish its goals by employing human, financial and physical resources for that
purpose.
a.Corporate governance
b.Social responsibility
c.Management
d.Diversity management
5.What do you associate cloud computing with?
a.The learning organisation B. Fourth Industrial Revolution
c.Re-engineering a business
d.Total quality management.
References
1.Sesinye, N. 2018. South Africa’s mobile phone evolution: What’s still to come.
Available at http://www.itnewsafrica.com/2018/05/south-africas-mobile-phoneevolution-whats-still-to-come/. [Accessed 9 December 2018].
2.Barnat, R. n.d. Strategic management: Formulation and implementation. Available
at http://www.introduction-to-management.24xls.com/. [Accessed 13 April 2015].
3.Griffin, R.W. 1990. Management. Boston: Houghton Mifflin Company.
4.Wren, D.A. 2011. The Centennial of Frederick W. Taylor’s The Principles of Scientific
Management: A Retrospective Commentary. Journal of Business and Management,
17(1): 11–22. Available at http://www.chapman.edu/business/_files/journals-andessays/jbm-editions/jmb-vol-17-01.pdf. [Accessed 15 April 2015].
5.Staff writer. 2017. How many employees Telkom now has. Available
at https://mybroadband.co.za/news/business/213914-how-many-employees-telkomnow-has.html. [Accessed 9 December 2018]; Fin24 Tech. 2015 Telkom working to
reduce workforce. Available at http://www.fin24.com/Tech/Companies/Telkomworking-to-reduce-workforce-20150713. [Accessed 1 December 2015]; Van Zyl, G.
2015. Telkom confirms plan to shed thousands of jobs. Available
at http://www.fin24.com/Tech/Companies/Telkom-confirms-plan-to-shedthousands-of-jobs-20150609. [Accessed 1 December 2015].
CHAPTER 7
Planning
Mari Vrba
The purpose of this chapter
The purpose of this chapter is to explore the concept of planning as the first of four
management functions, as defined by the management process introduced in Chapter 6.
Planning is the basis for the rest of the management functions, and incorporates goals and
plans. Plans specify how the organisation will achieve its goals. The management process
takes place in the context of the environment in which the organisation operates.
Learning outcomes
On completion of this chapter, you should be able to:
•explain the nature of planning as a management function
•describe the importance of planning as the first step in the management process
•describe the planning process
•interpret goals meaningfully
•describe the different organisational goals
•depict the hierarchy of goals
•differentiate between strategic, functional and operational planning
•differentiate between different strategies to accomplish different goals.
7.1Introduction
Planning gives direction to the organisation. It forces managers to be future-oriented
and enables the organisation to deal with changes in the business environment. In this
chapter, we briefly explain the benefits and costs of planning in organisations. Then, we
focus on the two components of planning, namely goals and plans, and explain the
planning process. We also discuss the focus of planning at the various levels of an
organisation.
The following case study illustrates how a successful integrated financial services
organisation uses the planning function to ensure that it remains competitive in a
dynamic and ever-changing global environment.
CASE STUDY: Discovery Limited
Discovery was established in 1992 as a small specialised risk insurer with the support of
Rand Merchant Bank. According to founder and Group CEO Adrian Gore, the founders did
not have a clearly defined business plan or specific growth targets when they started the
company. Instead they were inspired by the positive impact a large institution could have on
society by finding innovative solutions to societal needs.
The core purpose of the company, set at its inception as a specialist health insurer, was
to make people healthier and to enhance and protect their lives. The business has grown
into a global, integrated financial services organisation operating in 19 countries and
impacting 17,8 million lives globally (in 2018), and retains the same focus.
The evolution of Discovery
•1992: Discovery Health launches its ground-breaking, innovative medical savings
account, placing clients in control of their day-to-day medical spending.
•1997: Launches Discovery Vitality, the internationally recognised, scientifically proven
wellness programme that draws on behavioural economics.
•1999: Discovery Limited lists on the Johannesburg Securities Exchange.
•2000: Enters the life insurance industry by launching Discovery Life.
•2004: Launches Discovery Card, a Visa-based credit card that rewards members for
being healthier.
•2004: Enters the United Kingdom market by forming a joint venture, PruHealth, with
Prudential plc.
•2007: Discovery Limited and Prudential plc. launch PruProtect in the UK, offering
Discovery products in the UK.
•2007: Launches Discovery Invest, entering the savings and investment industry.
•2009: Expands into China by acquiring a 25 per cent share in Ping An Health Insurance
Company of China Ltd, a wholly-owned subsidiary of Ping An Insurance (Group)
Company of China.
•2010: Expands in the UK by acquiring Standard Life Healthcare and merges its
insurance book with that of PruHealth, thus creating the fourth largest private medical
insurance company in the UK.
•2011: Launches Discovery Insure, thus entering the short-term insurance industry.
•2012: Expands product offering in China by launching Vitality to Ping An Health
insurance clients in China.
•2013: Vitality is globally recognised as the global gold standard at the 2013 World
Economic Forum Annual Meeting in Davos, Switzerland.
•2013: Expands further into Asia by launching a joint venture with AIA Group Limited in
Singapore, the largest publicly listed Pan-Asian life insurance group. AIA Vitality makes
Discovery’s successful wellness-based life insurance model available to the Asia-Pacific
region.
•2014: Takes full ownership of PruHealth and PruProduct in the UK and rebrands to
Vitality Health and Vitality Life.
•2014: Expands to Europe by forming a strategic partnership with the General Group to
bring the wellness solution to Europe.
•2017: The Vitality Group in the US and Discovery Partner Markets (that managed
partnerships with leading insurers) are restructured to become Vitality Group. The Group
forms partnerships and joint ventures to implement Vitality Shared-Value Insurance in
many parts of the world.
•2017: A report released at the World Economic Forum in Davos names Vitality Group a
leading health innovator.
•2017: The Registrar of Banks grants Discovery a banking licence, subject to
specific regulatory conditions, including conditions relating to the proposed shareholding
in the bank, and Competition Commission approval.
•2017: Launching of Global Vitality Network (GVN), which uses the Vitality One
technology infrastructure to offer a globally unified systems architecture that all markets
can access.
•2018: New initiatives include Vitality Invest and Discovery Insure Commercial Insurance.
Launching of Discovery for Business, which is aimed at the commercial sector. The
launching of Discovery Bank in 2019 is announced.
Discovery’s business model and how the company works
Discovery’s business model is ‘to offer its clients insurance and financial products and
services with Vitality at the foundation. This approach benefits businesses, stakeholders and
the broader society. Vitality is the key component that enables Vitality Shared-Value
Insurance. Helping clients to improve and manage their health, savings, and driving
behaviour, it gives insurance partners the ability to better understand and measure risk. This
results in more accurate pricing of premiums as clients continuously improve and engage
with their health status, as measured through Vitality. This further encourages positive
behaviour change.’ 1 Discovery’s businesses benefit from improved risk; clients are healthier
as they get more value from incentives (such as gym membership, discounts on flights and
Apple watches) and savings based on their Vitality engagement, and society benefits from
this cycle as well.
Discovery has successfully repeated and implemented its model in a range of adjacent
industries and new markets, both in its prime markets in South Africa and the United
Kingdom, as well as in global markets. Discovery’s portfolio of businesses in South Africa
include Discovery Health, Discovery Life, Discovery Invest, Discovery Insure and Discovery
Card, and the company plans to add banking to its portfolio in 2019.
In the United Kingdom, Discovery’s portfolio includes Vitality Health Insurance, Vitality
Life Insurance and Vitality Invest. Vitality Group manages the Group’s expansion outside
South Africa and the United Kingdom. In China and Australia, Vitality Group formed equity
partnerships with Ping An and myOwn Health Insurance respectively, and partnerships and
joint ventures with global insurers around the world.
Vitality forms the basis of Discovery’s Shared-Value Insurance model, through which
Discovery has enabled the world’s largest behavioural platform for insurers and other
financial services companies to access Vitality.
Source: Adapted
from
Discovery
Integrated
Annual
Report
2018.
Available
at https://www.discovery.co.za/marketing/integrated-annual-report-2018/. [Accessed 5 November 2018],
pp. 30-31 and p. 36.
Ambition 2018
In 2014 Discovery formulated Ambition 2018, with the ambition (vision) for Discovery to ‘be
the best insurance organisation in the world, one known for our values, innovation and
financial strength through our core business activities and a powerful force for social
good’.2 To measure itself against this ambition, Discovery set three criteria delineating its
components.
•Social and financial impact: Targets were set for pre-tax earnings, profit growth, return
on capital, and the number of members.
•Unique foundation: Achieving a global platform, science and data, a powerful brand, the
employer of choice for critical skills and a values-based culture.
•‘Brilliant businesses’: The businesses are disruptive in their markets, offer sustainable
products, meet complex customer needs, generate excellent member engagement,
deliver superior actuarial dynamics and offer an exceptional service ecosystem.
In his 2018 Annual Review, Mr Gore reflected on the company’s progress towards
achieving Ambition 2018, stating that Ambition 2018 has been an excellent driver of the
company’s strategy and has led to disciplined models for organic growth, capital and cash
management and building a strong portfolio of diversified businesses. He added that the
Discovery business model was ‘successful in a range of adjacent industries and markets,
leading to our strong conviction that it is disruptive and differentiating, and a positive force for
good in society’.3 When the company’s performance was measured in all its markets against
the stretch targets set for Ambition 2018, the company had established a global leadership
position; had met the financial and social impact targets; and its businesses were found to
be disruptive and differentiating, and performing within expectation.
Control
The company continuously monitors its performance across a range of measures in line with
its high-performance culture. The key performance indicators used at the company to
measure performance are:
•strategy measures: market position, new products launched each year and roll-out of
the business model;
•service measures: member perception scores and broker or franchise perception
scores;
•social measures: growth in lives that are impacted;
•financial measures: normalised headline earnings, embedded value, solvency, return on
capital (ROC), core new business API, higher value of Discovery Life and Invest, growth
in normalised profit from operations and employee turnover; and
•people measures: learning and development and the number of people participating in
wellness days.
The environment, risks and opportunities
Discovery’s operational environment plays a crucial role in its ability to meet performance
objectives, but its robust business model is responsive to broad environmental risks and
supports its business strategy and performance. The company has clear strategies to
manage its risks, to capitalise on the opportunities in its markets, and to set deliverables and
requirements that ensure it delivers on its short-, medium- and long-term objectives and
targets.
Vision and long-term strategy
Discovery’s vision for 2021 is ‘to be the world’s best insurance organisation and largest
behavioural platform through which leading global insurers and companies can access the
Vitality Shared-Value Insurance model’.4 The company’s long-term growth strategy is to
continue driving strong organic growth by using its repeatable model, supported by its Vitality
platform and Shared-Value Insurance model, to expand into new markets and industries and
form new partnerships.
Discovery has identified its focus areas for the next three years (to 2021):
•continue to scale businesses and its model to diversify earnings;
•in South Africa and the UK, to focus on growing emerging and new businesses,
including Discovery Bank and Vitality Invest; and
•continue to expand the Vitality Group by entering into new partnerships and new
markets, while growing existing businesses, and to identify opportunities.
Medium- and long-term goal setting
Discovery’s business model and strategy aim to deliver tangible financial benefits for the
company. The strategy is implemented through medium- and long-term goal setting plus a
robust growth methodology and a sophisticated capital philosophy.
Sources: Gore, Adrian. 2018. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual report 2018. Available at https://www.discovery.co.za/marketing/integrated-annualreport-2018/ [Accessed 5 November 2018]; Discovery Integrated Annual Report 2018. Available
at https://www.discovery.co.za/marketing/integrated-annual-report-2018/ [Accessed 5 November 2018];
Gore, Adrian. 2017. Review from Adrian Gore Discovery Chief Executive. In Discovery Integrated Annual
Report 2017. Available at https://www.discovery.co.za/marketing/integrated-annual-report/?page=1.
7.2The benefits and costs of planning
There is a saying that if you do not know where you want to go, any road will take you
there. Managers need to know which way to go and planning provides that direction.
For example, Discovery succeeds, even in a challenging global business environment,
because its strategic direction has remained constant. While the organisation evolves
over time, the strategy continues to be relevant and has enabled the organisation to
consistently deliver good results.
7.2.1The benefits of planning
Planning has many benefits, and the more turbulent the environment, the greater the
necessity for planning. How do managers plan for the future in an environment
characterised by constant change?
Managers cannot predict the future; the planning exercise cannot change the
business environment and no plan can be perfect. However, managers can plan to steer
the organisation in the best possible direction, taking into consideration the
organisation’s internal strengths and weaknesses. Good managers understand that
although they are leading the organisation in a predetermined direction, they should
anticipate change in the environment, and adjust their goals and plans accordingly
when necessary. Since 2008, the world economy has been plagued by many crises, yet
some organisations have managed to produce creditable results consistently. How did
they do it? Some of the benefits of planning are listed below, and examples from our
case study on Discovery illustrate how this global organisation has used the benefits of
planning to its advantage, even in the prevailing, challenging business environment.
7.2.1.1Planning provides direction
The most important function of planning is that it gives direction to the organisation in
the form of goals and plans. By establishing where the organisation is heading (goals)
and formulating plans to attain these goals, managers ensure that the organisation is
both effective (providing products or services that the market wants)
and efficient (providing products and services at the lowest cost).
Consider how planning gives direction in a global organisation such as Discovery.
During 2014, the company formulated a bold ambition for 2018, set across three
categories with stretch targets for its businesses, its social and financial impact and its
unique foundation. The ambition was to be ‘the best insurer in the world and a powerful
force for social good’.5 Discovery’s core purpose, business model, values, technology
platform and brand simultaneously drove its performance during this period. In 2018,
Mr Gore, the Group CEO, reported that Ambition 2018 has been an excellent driver of the
company’s strategy and has led to disciplined models for organic growth, capital and
cash management and building a strong portfolio of diversified businesses.6
7.2.1.2Planning reduces the impact of change
The process of goal-setting and planning is, by definition, future oriented. Managers
continually scan the environment to anticipate change that may affect the organisation
in the future. They plan for the organisation to benefit from opportunities and to avoid
threats, thereby reducing uncertainty, guesswork and the risks caused by change.
In the 2018 Discovery Annual Review, the company identified risk factors in the
economic environment of its primary markets, South Africa and the United Kingdom. In
South Africa, factors such as a poor growth forecast, inflationary pressures, the
depreciating rand and a high unemployment rate contribute to credit default and claims
rates from its clients. In the UK, the risk lies in the economic uncertainty surrounding
the country’s exit from the European Union, coupled with subdued levels of inflation.
These factors contribute to low interest rates, which in turn affect Discovery’s product
pricing. In response to these threats, Discovery diversifies by geography and industry to
help improve its resilience and by providing products that are responsive to the
volatility in interest and inflation rates affecting the company and its clients.7
7.2.1.3Planning promotes coordination
Planning focuses all activities in an organisation in one direction: to attain the
organisation’s goals effectively and efficiently. If all the members of the organisation are
aware of the goals they have to meet, they can co-ordinate their activities. This will
foster co-operation and teamwork.
Discovery’s Global Vitality Network (GVT) illustrates how the company uses
advanced technology to co-ordinate aspects of its diversified operations. All the
Discovery businesses and partnerships apply the Vitality Shared-Value Insurance model
and their assets, programmes, data and brand assets have been centralised in the Global
Vitality Network (GVN), using the Vitality One technology infrastructure to offer a
globally unified systems architecture that all markets can access. The GVN increases
opportunities for integration and growth, thus supporting Discovery’s broader business
strategy.8
7.2.1.4Planning ensures cohesion
The increasing complexity of organisations and the interdependence of all the parts of
the organisation (business units, departments, sections, teams and individuals)
emphasise the necessity of planning to ensure cohesion. Planning enables top
management to see the organisation as a total system in which the goals of all the
different parts of the organisation are reconcilable with each other as well as with the
primary goals of the organisation as a whole.
The Discovery Shared-Value Insurance model, with Vitality as its basis, underpins all
Discovery’s businesses, thus ensuring cohesion throughout the company and support
for its broader business by increasing product integration and cross-selling
opportunities across the company’s portfolio of businesses and products.9
7.2.1.5Planning facilitates control
Control is the process by which management ensures that the actual organisational
activities are compatible with the predetermined goals and planned activities. Control
enables management to measure actual performance against set goals and plans, and to
take corrective action if significant deviations occur.
During the planning process, managers formulate organisational goals and plans at
various levels of the organisation. These goals and plans later facilitate control. Without
planning, control cannot take place.
Discovery, for example, continuously monitors its performance across a range of
measures in line with its high-performance culture. The key performance measures the
company applies are strategy-, service-, social-, financial-, and people measures (for
more details, see case study).10
7.2.2The costs of planning
Despite the obvious benefits of planning, it can also result in the following costs to the
organisation.11
7.2.2.1Planning may create rigidity
Managers may not be inclined to deviate from set plans, even when changes in the
environment may require flexibility in terms of planning.
7.2.2.2Planning consumes management time
Planning is time consuming and may require a substantial portion of the valuable time
and energy of managers.
7.2.2.3Formal plans may replace intuition and creativity
The formal planning process can turn into a programmed routine and subsequently
diminish the vital role of creativity and intuition in planning.
7.2.2.4Planning could cause delays in decision-making
Planning could shift the focus in an organisation from performing to evaluating,
resulting in a delay in making crucial decisions regarding environmental changes that
influence the organisation.
7.3Managerial goals and plans
If you intend to travel from Johannesburg to Cape Town, it would be sensible to buy a
map. The map would enable you to set goals for reaching Cape Town. The most
important, primary goal would be to reach Cape Town on a specific date. Secondary
goals could be that you should reach a town midway to Cape Town to sleep over in
before it gets dark on the first day of the journey and that the the cost of the trip should
not exceed a specific budgeted amount. In this way, you could formulate several plans to
achieve the main goal of reaching Cape Town.
On a personal level, most people are quite familiar with setting goals and
formulating plans. The managerial function of planning in organisations is similar, as it
comprises the same two components.
First, managers need to ask the question: Where do we want this organisation to be
at a specific future date? (This will entail setting goals.) Then they need to ask: How will
the organisation achieve its goals? (This will entail formulating plans.) Thus, the concept
of planning incorporates two components: determining the organisation’s goals and
developing plans to achieve these goals.
Against this background, an organisational goal (or objective) can be defined as ‘a
desirable state of affairs that an organisation aims to achieve at some point in the
future’.
An organisational plan can be defined as ‘the means by which the goal is to be
realised’. The concepts of goals and plans are interrelated.
7.3.1The nature of goals
Organisational goals are the starting point of the planning process. Goals flow directly
from the organisation’s vision and its mission statement but are more specific.
Organisations have multiple goals, and the type of goal that is set is influenced by
the organisational level at which it is set. Goals range from strategic goals formulated
by top-level managers to operational goals formulated by lower-level managers.
The focus of goals differs because different goals pertain to different aspects of the
organisation, such as finances, the environment, participants and survival. Strategic
goals are holistic in that they apply to the whole organisation.
The time period of goals may be short term, intermediate or long term.
Goals may be publicly stated or not. The degree of openness is concerned with
whether the goals are official or operative. Official goals are formally and publicly
declared (in the annual reports and the media), whereas operative goals represent the
private goals of an organisation. Companies listed on the Johannesburg Securities
Exchange (JSE) have to make their annual results public because shareholders (people
who buy the company’s shares on the stock exchange) have a right to know about the
financial and managerial state of the companies in which they invest. They do not have
to make public other goals, such as operational and strategic goals relating to, for
example, the company’s competitive advantage.
7.3.2The importance of goals
It is crucial for managers to establish where the organisation is heading. Goals are
important in this regard for the following reasons:
•Goals provide guidance and agreement on the direction of the organisation, and
they steer all the employees and the activities they perform in the same direction.
Without goals, a business is like a ship without a rudder.
•Clearly formulated, unambiguous goals facilitate effective planning in terms
of resource deployment.
•Goals can inspire and motivate employees, especially if the employees can perceive
a specific link between their performance in terms of goal achievement and the
rewards they receive.
•Goals provide the basis for the effective evaluation of employee and organisational
performance, and for the control of organisational resources.
It is clear that effective goal-setting plays a vital part in the success of organisations. To
ensure that goals are as effective as possible, they should adhere to specific criteria.
7.3.3Criteria for effective goals
To improve the chances of successfully achieving goals, managers should ensure that
goals are not ambiguous. The SMART framework states that goals should be specific,
measurable, attainable, relevant and time bound. Managers can follow this framework
in order to formulate goals properly:
•When a goal is specific, it indicates what the goal relates to, the period to which the
goal refers and the specific desired results of the goal.
•When a goal is measurable, the goal is stated in such terms that the result can be
evaluated objectively and in quantified terms. Managers must be able to see if the
goals are satisfied when they compare actual results with predetermined goals. This
is especially true for tactical and operational goals. To say, for example, ‘market
share should be increased’ is too vague and not measurable, whereas to say, ‘market
share should increase by 10 per cent in Gauteng over the next two years, by the
financial year end, ending 31 December 2021’, is precise and measurable.
•When a goal is attainable, it is realistic, yet it should still provide a challenge.
Furthermore, managers should assign the responsibility for reaching goals to
specific individuals. Each manager generally has responsibilities for setting goals at
his or her level in the organisation. This means that the relationship between the
expected results and the people responsible for the results should be clearly stated
so that managers fully understand the aims and goals, and are in no doubt about
what they have to do to achieve them.
•When a goal is relevant, it relates to the organisation’s vision, mission
and strategic goals. It follows that the various goals in an organisation should be
compatible with one another because they all derive from the same strategic goals.
‘Horizontal consistency’ refers to the compatibility of the objectives of various
departments with one another. If, for example, the marketing department proposes
to extend its line of products, the costs of production will increase, and therefore the
production division will find it difficult to embark on cost-cutting as one of its goals.
‘Vertical consistency’ means that departmental goals are compatible with those of
subsections. For example, if marketing sets a target of an 8 per cent increase in sales,
this has to be compatible with the sales objectives set for the geographical markets
of the business (in other words, the total increase in sales for the particular regions
should add up to 8 per cent).
•When a goal is time bound, it has a specific time limit. People are likely to ignore
goals with no time limit because there is no sense of urgency associated with them.
So, instead of saying, ‘increase production by 1 000 units’, managers should rather
say, ‘increase production by 1 000 units by 31 December this year’.
7.3.4Integrating individual and organisational goals:
Management by objectives (MBO)
Management by objectives (MBO) is a technique designed to achieve the integration of
individual and organisational goals in organisations. Management by objectives is a
system by which managers and employees define goals for every department, project
and person, and use them to monitor subsequent performance.
The assumptions underlying the successful implementation of an MBO programme
are that it should have the support of top management and that employees should
understand the process. All employees must have a clear understanding of the
organisation’s purpose, vision, mission, long-term goals and strategy. Individual
employees’ goals derive from the goals of the business unit, department, section, group
or team to which they belong, which in turn derive from the organisation’s long-term
goals.
The process goes as follows:
•The manager and the employee have an initial discussion that results in the
formulation of a clear job description and key performance areas for the employee.
•The employee establishes potential key performance targets in the
predetermined areas of responsibility for a forthcoming period. The employee and
the manager meet to develop a set of goals for the employee to which both are
committed.
•The employee and manager mutually establish checkpoints to measure the
employee’s progress.
•Evaluation of the degree of goal attainment takes place at the end of the
predetermined period. The evaluation focuses on the analysis of the achieved results
compared with the predetermined goals.
An advantage of management by objectives is that managers and employees at all levels
of the organisation focus their efforts on the attainment of organisational goals. The
process links individual goals to organisational goals and if implemented correctly, it
can have a motivational effect on employee performance and thus on the overall
performance of the organisation. However, it can do more harm than good when it is
reduced to an annual process of filling in forms, which are then filed and forgotten, as
this has a negative effect on employee motivation. Good personal relationships between
managers and employees are a prerequisite for the successful implementation of the
process.
7.3.5The nature of plans
While a goal is a desired future state that the organisation attempts to achieve, a plan
shows what must be done to achieve organisational goals. It indicates how the
organisation plans to reach its goals by specifying the resources that will be used, the
period in which the plans must be implemented and all the other actions that will be
necessary to achieve the goals.
When formulating plans to achieve the organisation’s goals, managers consider
several alternative plans of action and ultimately select the best alternative (or
alternatives) to achieve the predetermined goals.
Various factors influence managers when they develop alternative plans, such as
external factors, the organisation’s strengths and weaknesses, and the costs associated
with plans.
External factors, such as market factors, legislation or economic trends, influence the
business environment and subsequently the ability of the organisation to achieve its
goals. Such environmental influences occur in the form of opportunities to exploit or
threats to avert (see Chapter 4 on environmental scanning). Managers consider these
opportunities and threats when making alternative plans.
Managers also take cognisance of the strengths and weaknesses in the organisation’s
internal environment when they develop alternative plans. They aim to capitalise on the
organisation’s strengths, such as particular skills, a patent, capital, the image of the
organisation, possession of a unique raw-material source or a marketing channel. At the
same time, plans should not expose the weaknesses of the organisation to threats in the
environment.
Managers weigh the costs of alternative plans against their respective advantages
and through this process develop rational plans.
7.4The planning process
7.4.1The planning context
Several factors determine the context in which planning takes place. These variables set
the parameters within which managers can formulate realistic organisational goals and
plans. Managers cannot set goals and make plans that are unattainable in terms of
either the environment in which the organisation operates or the resources at the
disposal of the organisation. For example, the corner café cannot have a goal such as ‘to
gain 50 per cent of the market share in selling groceries in Soweto this year’. Such a goal
is unrealistic in terms of the café’s planning context. On the other hand, Discovery’s
growth strategy for 2021 to expand into new markets and adjacent industries, and to
form new partnerships, is realistic and feasible.
The five variables that set the parameters for organisational planning are: the
purpose of the organisation and the environment; the organisation’s mission statement;
the organisation’s environment; the managers’ values and the managers’ experience.
The purpose of the organisation includes its obligation to society (for example,
providing safe products at reasonable prices) and its obligation to its stakeholders (for
example, to make a profit) or a combination of these factors.
As explained in the case study at the beginning of the chapter, Discovery’s business
model is based on the Vitality Shared-Value Insurance model, which underpins the
company’s purpose of making people healthier and enhancing and protecting their lives.
This purpose is the driver of the company’s corporate-level and business-level
strategies.
The mission statement sets out the unique purpose that distinguishes the
organisation from other organisations of its type. The mission statement, derived from
the vision of the organisation, guides the goal-setting and planning in organisations.
The environment is one of the most crucial variables that influences planning. In
Chapter 4, it was emphasised that organisations are open systems that have specific
interactions with their environments. To survive, organisations must plan to take
advantage of external opportunities and to avoid threats in the environment. During the
strategic-planning process, organisations set strategic goals and formulate strategic
plans to reconcile their internal strengths and weaknesses with external opportunities
and threats. Managers at different levels of the organisation transform the strategic
goals and plans into tactical and operational plans, as well as individual goals and plans.
Values influence and cement the organisation’s culture, strategy and structure. They
also determine the organisation’s commitment to social responsibility. The values of
Discovery appear in the box below.
Values of Discovery Limited
•Business astuteness and prudence
•Innovation and optimism
•Great people
•Liberating the best in people
•Integrity, honesty and fairness
•Intellectual leadership
•Tenacity, urgency and drive
•Dazzle clients
Source: Our
business
model.
In Discovery
Integrated
Annual
Report
2018.
Available
at https://www.discovery.co.za/marketing/integrated-annual-report-2018/. [Accessed 1 November 2018], p.
30.
The experience of management is vital because it influences the planning
performance of managers.
In the case of Discovery, Mr Adrian Gore, a founding member of Discovery in 1992
and an actuary by profession, is still at the helm of the company as the Group Chief
Executive Officer 26 years after its inception. Mr Gore is one of South Africa’s top
entrepreneurs, and he is globally recognised as an innovative thinker on how wellness
and behavioural change integrate with health, life, insurance and motivating people by
giving them incentives to look after themselves.12
7.4.2Steps in the planning process
Planning is a process. By expanding on the example of travelling from Johannesburg to
Cape Town, the planning process becomes apparent.
If your goal is to travel by car from Johannesburg to Cape Town, many roads will
lead you there, and you can therefore develop different alternative plans
(Johannesburg–Durban–Cape Town, Johannesburg–Beaufort West–Cape Town or
Johannesburg–Knysna–Cape Town, for example). However, associated with each route
are specific variables that can help to make one of the options more attractive than the
others. For example, travelling from Johannesburg to Cape Town via Beaufort West is
much shorter than travelling from Johannesburg to Cape Town via Durban. To travel via
Knysna to Cape Town is another option, but while this route is scenic, there are cost and
time implications.
You must decide on a plan within a certain planning context – for example, you have
only two days to get to Cape Town, and your budget allows you a specific amount to pay
for the trip (including petrol, accommodation and food). To reach a decision, you will
evaluate each of the alternative plans in terms of the planning context and other
criteria, such as the dangers of travelling on South African roads in the dark.
After evaluating all the alternatives, you can select the best plan (travelling via
Beaufort West in two days). The next step is to implement the plan by booking a service
for your car a week before the trip and making a reservation to sleep over somewhere
halfway through the trip.
The final step is to travel to Cape Town, sleeping over in a town midway, Colesberg.
However, in the morning before leaving Colesberg, a traffic report on the radio warns
motorists that the road to Beaufort West is closed owing to flooding. In such an
eventuality, you need to implement an alternative plan and change your route by
travelling to Cape Town via Graaff-Reinet instead of Beaufort West.
This example illustrates that planning comprises a number of steps, which follow
each other in a specific sequence, thus forming a process. The steps in the planning
process are:
•Establish goals (e.g. reach Cape Town on a specific date).
•Develop alternative plans (e.g. different routes to Cape Town).
•Evaluate alternative plans (e.g. using criteria such as cost, time and so on).
•Select a plan (e.g. Johannesburg–Beaufort West–Cape Town).
•Implement the plan (e.g. service car, make reservations, drive to Cape Town).
•Do reactive planning, if necessary, when changes occur in the environment (e.g.
change plan and travel via Graaff-Reinet).
Figure 7.1 illustrates the planning process.
Although all managers follow the same steps of the planning process, as illustrated
by the simple example of travelling from Johannesburg to Cape Town, each level of
management has a different planning focus:
•Top-level managers formulate long-term strategic goals and strategic plans for the
entire organisation.
•Middle-level managers use strategic goals and strategic plans as inputs to develop
medium-term tactical goals and tactical plans for their functional departments.
•Lower-level managers use tactical goals and tactical plans to develop short-term
operational goals and operational plans for their sections.
Figure 7.1: The planning process
Figure 7.2 illustrates the planning process as goals and plans cascade down from the
strategic level to the operational level.
Figure 7.2: The levels of goals and plans and their time frames
7.4.3Strategic goals and plans
The first half of the 20th century was characterised by stable business environments
with low and stable rates of interest, few raw-material shortages, a slow and steady rate
of technological innovation, and a general economy in which inflation was practically
unknown. In such a stable environment, organisations were able to sell their products
or services without being too concerned about planning for the future. The assumption
was that future environments would be more or less the same as prevailing ones, so
that a mere extension or projection of previous plans was adequate to ensure profitable
survival.
However, since the 1950s, the business environment has been changing at an
unprecedented rate. Managers have had to look for new approaches because old ones
have proved to be of little use in an unstable environment. At the same time,
organisations have become larger and more complex. During the late 1950s,
organisations started to do long-term planning in an attempt to take countermeasures
against instability in the business environment. In the 1960s, and especially in the
1970s, strategic planning became a popular tool used by organisations in an effort to
keep abreast of change in the business environment and to develop longterm or
strategic plans.
Today, organisations ranging from government departments and not-for-profit
organisations to global organisations use strategic planning to help them operate in the
current complex, global business environment.
Major technological advances in various fields indicate that the world is at the
beginning of a Fourth Industrial Revolution, a new era that builds and extends the
impact of digitisation in novel and unanticipated ways. The World Economic Forum
describes the Fourth Industrial Revolution as the advent of ‘cyber-physical systems’
involving entirely new capabilities for people and machines.13
These capabilities represent new ways in which technology becomes embedded
within societies. Examples include genome editing and new forms of machine
intelligence, for example, self-driving cars and drones. The technology related to the
‘digitisation of matter’ will advance rapidly, for example the creation of objects, such as
cars and houses, as well as human tissue, bones and custom prosthetics by 3D printers.
New technology will soon integrate computers into clothing. Within the next few years,
clothes connected to the Internet will be available, such as sports shirts providing the
wearer with real-time workout data by measuring sweat output, heart rate and
breathing intensity. Furthermore, new approaches to governance, relying on
cryptographic methods, for example, the blockchain (the shared database technology
where transactions in digital currencies such as the Bitcoin are made) are emerging.14
Organisations worldwide are witnessing the major impact of new technology in
their industries. On the demand side, organisations have to change the design,
marketing and distribution of their products and services to adapt to new patterns of
consumer behaviour and engagement, which is a consequence of consumers’ access to
mobile networks and data. On the supply side, the introduction of new technologies by
agile, innovative competitors disrupt existing industry value chains by using global,
digital platforms for research and development, marketing and distribution to supply
their customers with better quality products, faster and cheaper.15 Discovery is an
example of an organisation that is disruptive and differentiating in the industries where
it operates. Through its Shared-Value Insurance model, with Vitality as its basis,
Discovery has enabled the world’s largest behavioural platform which insurers and
financial services organisations use to access Vitality (see case study). The company is
currently in the process of adding a central research and development function to its
Global Vitality Network (GVN).
Crucial skills that are required within organisations in the context of the Fourth
Industrial Revolution are creativity and imagination, strategic and critical thinking
skills, problem-solving skills and agile leadership skills.16
7.4.3.1Strategic goals
Top managers formulate strategic goals that apply to the organisation as a whole over
the long term. Strategic goals include a vision, a mission statement and long-term goals.
A vision implies that managers need to think about new possibilities that will carry
their organisations into the future. When asked what his job as Group CEO of Discovery
involves, Mr Gore answered that his job is to create a vision, hope and inspiration for
the organisation.
A vision also promotes change and provides the foundation for a strategic plan. The
vision is a picture of the future the organisation seeks to create. Organisations with
clear vision statements generally outperform organisations without a vision. When
there is a clear vision, decision-making focuses on the important issues, and individuals
are motivated because they can see how their efforts contribute to the success of the
organisation.
As described in the Discovery case study, the company’s vision for 2021 is ‘to be the
world’s best insurance organisation and largest behavioural platform through which
leading global insurers and companies can access the Vitality Shared-Value Insurance
model’.17
The mission statement spells out the mission or overarching goal of the
organisation. The mission statement sets the organisation apart from other
organisations operating in the same industry by defining it in terms of its unique
combination of products, customers and technology. In the mission statement, the
organisation answers three important questions:
1.What is our business (products and services)?
2.Who are our customers (markets)?
3.How do we provide our products or services (technology)?
The mission statement may also include the organisation’s intention to secure its
survival through sustained growth and profitability. In addition, the organisation may
use it to make a statement about the organisation’s culture, public image, self-concept,
social responsibility and the quality of its products. The mission statement sets the
stage for strategic, tactical and operational planning in the organisation.
Discovery, for example, uses its unique Vitality Shared-Value Insurance model to
offer insurance and financial products and services across its businesses in South
Africa and the United Kingdom and in 19 countries (in 2018) worldwide (market).
Discovery uses behavioural economics, clinical data and actuarial data as
their technology (see case study).
Its product, markets and technology sets Discovery apart from other organisations
competing in the finance and insurance markets.
Long-term strategic goals derive from the organisation’s vision and mission
statement. They are complex and deal with the organisation as a whole. While their
focus is long term, the exact period may vary from organisation to organisation,
depending on the industry.
In considering long-term goals, top managers usually include goals in such critical
areas as profitability, productivity, competitive position, human resources development,
human relations, technological leadership and social responsibility.
Strategic goals should be clear, since tactical goals derive from them.
An example of how organisations use long-term strategic goals is evident from
Discovery’s Ambition 2018. The company set stretch targets for its businesses, its impact
and its foundation. The success of attaining these goals was measured against specific
metrics: financial and social impact, brilliant businesses and a unique foundation (see
case study for more detail about these metrics).18
7.4.3.2Strategic plans
In order to achieve the organisation’s strategic goals, top managers develop strategic
plans. These plans focus on the organisation as a whole and not on a specific function or
operation, although the ultimate aim is to create synergy.
Top managers tasked with developing strategic plans have access to the necessary
information about the organisation and its business environment. While formulating the
strategic plans, these top managers interpret the opportunities and threats in the
business environment and determine their potential impact on the organisation. The
process requires managers to think conceptually, integrating the consequences of
alternative strategic plans with the needs and resources of the organisation in order to
create a competitive advantage.
Strategic plans usually refer to a period of more than five years, but this depends on
the industry in which the organisation operates. Strategic plans filter down in the
organisation to form the basis for tactical plans, and subsequently for operational plans.
GENERIC STRATEGIES
The selection of a generic strategy entails the core idea about how the organisation
plans to compete in its market or markets. Generic strategies include strategies
concentrating on cost leadership (capitalising on sales and keeping costs as low as
possible), differentiation (differentiating its products or services from those of its
competitors), focused low-cost strategy (providing products or services at the lowest
costs in a specific market segment) and focused differentiation (differentiating its
products and services within a specific market segment).
CORPORATE STRATEGIES
Corporate (grand) strategies address two aspects: (1) identifying in which, and in
how many businesses and industries the organisation wishes to compete, and (2) how
the organisation can build synergy and competitive advantage among business units.
The driver of strategy at the corporate level (and also the strategies at the individual
business level) is the purpose of the organisation. Corporate strategies provide the
direction on how the organisation aims to attain its strategic goals. Corporate strategy
determines whether the organisation will expand its present business or businesses,
buy or start other businesses (internal and external growth strategies), reduce
operations by selling or closing parts of the business (turnaround or decline
strategies) or use corporate combination strategies. The following are examples
of corporate growth strategies:
INTERNAL GROWTH STRATEGIES
•Market development. The organisation plans to develop existing markets for its
present products more intensively or to develop new markets for existing products.
In the latter case, the organisation considers new regions or the global market. The
technology and products remain the same.
•Product development. The organisation develops new products for existing markets
or modifies existing products to win greater approval among consumers. The
market and technology remain the same.
•Concentration growth. The organisation directs all its resources and skills to the
profitable growth of a single product in a single market. In short, the organisation
concentrates all that it has on what it does best to realise its mission.
•Innovation. The organisation constantly improves products or services. It refers to
the development of new products or services to take advantage of the initial high
profitability of a better product or service, or using new technology in a specific
industry.
EXTERNAL GROWTH STRATEGIES
•Integration. A horizontal-integration strategy implies that the organisation takes
over organisations similar to it because it wants to increase its market share, or
scale. This strategy gives the organisation access to new markets and gets rid of
competition. In the case of a backward vertical-integration strategy, the organisation
moves closer to its sources of supply by acquiring an organisation or organisations
that supply it with critical resources, such as raw material or a distribution
channel. Forward-vertical integration involves the acquisition of a business closer to
the end consumer of the organisation’s products or services, for example an oil
company opening service stations selling its petrol.
•Diversification. An organisation follows this strategy when it acquires other
organisations and so enters into new activities, or when it sets up a completely new
entity. This strategy spreads risk, results in synergy and can achieve quicker growth
or higher profits. Related diversification refers to an organisation acquiring another
organisation or organisations related to it in terms of market, product or
technology. Unrelated diversification refers to an organisation acquiring another
organisation or organisations unrelated to it in terms of product, market or
technology.
CORPORATE COMBINATION STRATEGIES
•Merger. A merger takes place when two or more organisations pool their resources
to form a new organisation.
•Acquisition. An acquisition takes place when one organisation, the parent
organisation, acquires another organisation, or parts of the organisation (the target
organisation), for cash or equity in the parent organisation. If the management of the
target organisation rejects the acquisition offer, the parent company can approach
the shareholders in the target company to buy their shares and thus ‘take over’ the
organisation in a hostile fashion.
•Joint venture. When two or more organisations join and use some of their resources
to form a separate, new business, in which both share ownership, they form a joint
venture.
TURNAROUND OR DECLINE STRATEGIES
•Turnaround. An organisation follows a turnaround strategy during difficult times,
when its profits are declining, compelling it to cut costs by terminating unprofitable
products, getting rid of unprofitable assets and, in particular, improving ineffective
management.
•Asset reduction. An asset reduction (or harvesting strategy) is implemented when
an organisation wishes to maximise cash flow in the short term (regardless of the
long-term effect of such a strategy) by disposing of a subsidiary that has delivered its
maximum returns to the organisation.
•Divestiture. A divestiture strategy usually involves selling a business or parts of it
in line with its mission.
•Liquidation. An organisation chooses a liquidation strategy when it admits failure
and wants to keep shareholders’ losses to a minimum.
The Discovery case study contains many examples of how the organisation strategises.
Above all, its strategic direction is driven by its core purpose. Since inception, the
company’s core purpose is ‘to make people healthier and enhance and protect their
lives’.19 The focus of the company on its purpose has resulted in a business model
geared to creating shared value which it implemented in its primary markets and
globally. 20 In line with this purpose, Discovery has built a portfolio of ‘brilliant’
businesses’.
Discovery’s generic strategy is differentiation (differentiating its products or
services from those of its competitors).
Discovery’s growth strategy in its primary markets, South Africa and the United
Kingdom, is to focus on growing emerging and new businesses, including Discovery
Bank and VitalityInvest. In the Vitality Group, the strategy is to expand into adjacent
industries and new markets, and form new partnerships by implementing its SharedValue Insurance model.21
A strategic focus of Discovery is to launch new products each year that meet
complex consumer needs and that are sustainable. For example, during 2017–2018, a
product offered by Discovery Life, the Global Education Protector, was recognised as
one of the most innovative life insurance products globally.22
Discovery has received wide global recognition for innovation in insurance, for
example, a report released in 2017 at the World Economic Forum in Davos named
Vitality Group a leading health innovator. Boston Consulting Group named Discovery as
one of the leaders in digital innovation that has built ecosystems using digital
technology to fill market voids, and is continuously innovating with a customer-centric
focus. 23
Discovery uses its model to build a strong portfolio of diversified businesses in the
healthcare, life insurance, short-term insurance, savings and investment, wellness and
banking markets. 24 The company diversifies by geography and industry.
Discovery expanded into China by acquiring a 25 per cent share in Ping An Health
Insurance Company of China Ltd, a wholly-owned subsidiary of Ping An Insurance
(Group) Company of China.25
Through Vitality Group, Discovery forms partnerships and joint ventures globally
to implement the Vitality Shared-Value Insurance model. Examples of Discovery’s
equity partnerships, through Vitality Group, include Ping An Health in China and
myOwn in Australia. The company forms partnerships and joint ventures throughout
the world with leading global insurers. 26
7.4.4Tactical goals and plans
Strategic goals and plans serve as inputs for middle managers to formulate tactical goals
and plans (also called functional goals and plans). Tactical goals and plans are set at the
level of middle management by the managers in each functional area. Tactical goals and
plans focus on how to carry out those tasks necessary for the achievement of strategic
goals.
7.4.4.1Tactical goals
Tactical goals are medium-term or short-term goals derived from the long-term goals.
For example, in order to increase market share from 10 per cent to 20 per cent over the
next five years (a long-term goal), sales in an organisation will have to increase by 18
per cent a year and the organisation will need additional resources (medium-term or
tactical goals).
7.4.4.2Tactical plans
Tactical plans have a more specific focus when compared with strategic plans because
they deal with people and actions. Middle-level managers who are department heads
(such as marketing managers or operations managers) formulate medium-term plans
for their various functional areas to realise tactical goals.
Tactical plans take into consideration strategic goals and plans, tactical goals,
resource allocation, time issues and human-resources commitments.
Table 7.1 shows examples of tactical or functional plans.
Table 7.1: Tactical or functional plans
Functional management
areas
Key aspects to be considered
Marketing
Product line, market position, distribution channels, market communication and price
Finance
Policy on debtors, dividends, asset management and capital structure
Production and operations
Productivity, locations and legislation issues
Human resources
Labour relations, labour turnover, training of human resources and equity and divers
Procurement
Suppliers, policy on creditors and sources of raw materials
Research and development
Develop new products and improve existing products and services, information tech
communications
Public relations
Liaise with stakeholders inside and outside the organisation to promote good relation
Information technology
Maintain internal and external communication networks with employees, suppliers, c
customers and the public
7.4.5Operational goals and plans
Middle-level and lower-level managers develop operational goals and plans.
7.4.5.1Operational goals
Operational goals (or short-term goals) refer to a period of no longer than one year.
Operational goals deal with the day-to-day activities of an organisation and the
allocation of resources. They take the form of unit goals and operational standards.
Operational plans are executed by first-line managers.
7.4.5.2Operational plans
Operational plans (or short-term plans) refer to a period of no longer than one year. The
purpose of operational plans is to achieve operational goals. Two basic forms of
operational plans are single-use plans and standing plans.
Single-use plans are developed to achieve a set of goals that are not likely to be
repeated in future. Programmes, projects and budgets are single-use plans:
•A programme entails a set of plans for attaining a one-time organisational goal. An
example of a programme is the building of a new office block.
•A project also entails a set of plans for attaining a one-time organisational goal, but
it is smaller in scope and complexity than a programme. It is often part of a larger
programme. An example of a project is the installation of the air-conditioning system
for a new office block.
•A budget is a numerical plan for allocating financial, human, physical and
informational resources to specific activities.
Standing plans are ongoing plans that provide direction for tasks that are performed
repeatedly in the organisation. Policies, rules and standard procedures are standing
plans:
•Policies are broad in scope and are derived from the organisation’s overall goals.
Policies define the boundaries for decision-making to ensure that decisions are
consistent with the organisation’s goals. Examples of policies are: ‘The customer is
always right’ and: ‘We pay our employees competitive wages’. They are broad
guidelines on managerial action. First-line managers rarely make policies. Instead,
they interpret and apply them. Managers must use their judgment within the limits
set by policies. For instance, a policy of: ‘We pay competitive wages to our
employees’ does not tell a manager what to pay a new employee. However, if the
industry rate for the specific job is in the R170–R250 per hour range, the policy
would clarify that offering an hourly starting rate of either R100 or R400 is not
acceptable.
•A rule is a statement that prescribes to employees what they may or may not do in
a specific situation. Managers often use rules when they confront a recurring
problem, to ensure consistency. For example, rules about lateness or absenteeism
permit managers to make disciplinary decisions quickly and fairly.
•Standard procedures and methods define a precise series of steps for attaining
certain goals. Examples are procedures for handling employees’ grievances and
methods of issuing refunds.
7.5The implementation of plans
Implementing the chosen plan involves developing a framework for its execution,
leadership to set the plan in motion, and the exercise of control to determine whether
the performance of the activities is going according to plan. If there is a deviation from
the plan, control will reveal this and reactive planning will be necessary. This implies
that managers may need to reconsider the goal and the resources required in order to
fit the new information about the environment.
7.6Summary
Planning is the starting point of the management process. It determines the ‘what’ and
‘how’ of organisational activities. The ‘what’ of planning refers to the various goals of
the organisation and the ‘how’ of planning describes the organisation’s plans to achieve
these goals. Goals and plans can be strategic, tactical or operational, and the period they
refer to can be long term, medium term or short term respectively. To implement the
plans, managers organise, lead and control organisational resources to achieve the longterm, medium-term and short-term goals of the organisation. The next three chapters
deal with the functions of organising, leading and control.
Small business perspective: The planning function in
small business organisations
27
Planning is the first step to determine the future course of action for the small business
organisation. Planning provides the map of where the small business is heading (goals) and
how it will get there (plans). The purpose of planning for a small business is to provoke the
interest of potential investors and guide the owner or managers in operating the business. It
serves to attract customers and prospective employees. The types of plans that will improve
a small business’s chances of survival include strategic plans before starting the business, a
formal business plan to attract investors and prospective employees and continuous
operational planning and control before and after the business starts operating.
Strategic planning for the small business provides the long-term direction of the
business and shorter-term objectives and plans to reach the long-term objectives.
The business plan is a formal plan and a tool to raise money. It contains a detailed
outline of the activities a new small business needs to perform to finance the business,
develop the product or service, and then market it and manage it. A well-developed business
plan can provide small business owners with a much greater chance of success.
Business Partners, formerly known as the Small Business Corporation, is an
organisation launched by the late Anton Rupert and his son Johan Rupert in the 1980s. The
company facilitates entrepreneurship through a comprehensive service offering of business
finance, mentorship and business premises to entrepreneurs in the small and medium
enterprise (SME) environment. The core of its focus is providing the entrepreneur with
finance for their formal business. Business Partners structures unique, individualised
financing solutions using shareholders’ loans, equity, royalties and term loans – or any
combination of these. Before parting with its money, Business Partners requires from an
entrepreneur a solid business plan and cash flow viability. It also assesses the technical and
managerial skills, integrity and commitment of the entrepreneur. 28
Operational planning entails setting policies and procedures as well as budgets, which
provide the basis for operating the business. These plans include selecting a location,
planning operations and physical activities, planning for and securing sources of supply for
goods and materials, planning for human resources requirements, setting up the legal
structure and the organisational structure, determining the organisation’s approach to the
market, establishing an efficient records system, and setting up a time schedule. A crucial
aspect of planning in small business organisations is financial planning, which comprises a
projection of income and expenses and the initial investment required, and identifying
possible sources of funds. Financial planning is vital to insure the feasibility and success of
the small business.
KEY TERMS
attainability
operational goals and plans
budget
organisational values
business strategy
planning context
concentration-growth strategy
policies
corporate strategy
product-development strategy
diversification strategy
programme
divestiture strategy
purpose
environment
relevancy
generic strategy
rule
horizontal-integration strategy
single-use plan
implementation of plans
specificity
innovation strategy
standard procedure
joint-venture strategy
standing plan
liquidation strategy
strategic goals and plans
management by objectives
tactical goals and plans
managers’ experience
time bound
market-development strategy
turnaround strategy
measurability
vertical-integration strategy
merger
vision
mission statement
Questions for discussion
Reread the case study at the beginning of this chapter and answer the following
questions:
1.Which examples from the case study illustrate the benefits of planning?
2.What is the difference between goals and plans?
3.Discuss the nature of goals and find examples in the case study of the various
characteristics of goals.
4.Explain what the planning context entails and use examples from the case study
to explain the planning context of Discovery.
5.Find and discuss examples of strategies followed by Discovery that were not
discussed elsewhere in this chapter.
Multiple-choice questions
Lower-level, middle-level and top-level managers perform the same management
functions, but the focus of their activities is different. Consider the following statements
and answer Questions 1, 2 and 3:
i.Focus on creating and maintaining a competitive advantage for the organisation.
ii.Develop plans focused on functional areas.
iii.Focus planning narrowly with short time horizons.
iv.Perform the management functions of planning and control.
v.Create a vision of the future for the organisation.
vi.Use standing plans.
vii.Use information that is specific and quantitative when planning.
viii.Set tactical goals.
ix.Focus on the entire organisation.
x.Implement strategic plans.
1.Statements __________ describe the work of lower-level managers.
a.i, iv, v, ix
b.ii, iv, vii, x
c.iii, iv, vi, vii
d.iv, v, vi, vii
2.Statements __________ describe the work of top-level managers.
a.i, iv, v, ix
b.ii, iv, vii, x
c.iii, iv, v, vi
d.iv, v, vi, vii
3.Managers can follow the SMART framework to formulate __________ properly.
a.goals
b.a vision
c.a mission statement
d.plans
4.Which of the following is a standing plan?
a.programme
b.project
c.policy
d.budget
5.Which of the following is not a corporate combination strategy?
a.merger
b.acquisition
c.asset reduction
d.joint venture
References
1.Discovery. 2017. Our business model. Discovery Integrated Annual Report 2017.
Available
at https://www.discovery.co.za/site/binaries/content/documents/managedcontent/d
iscoverycoza/assets/corporate/investor-relations/integrated-annual-report2017.pdf/integrated-annual-report-2017.pdf/contentdelivery%3Abinary. [Accessed 6
November 2018], p. 20.
2.Ibid., p. 1.
3.Gore, A. 2018. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report 2018. Available
at https://www.discovery.co.za/marketing/integrated-annual-report-2018/.
[Accessed 5 November 2018], p. 5.
4.Discovery. 2018. Discovery Integrated Annual Report 2018. Available
at https://www.discovery.co.za/marketing/integrated-annual-report-2018/.
[Accessed 5 November 2018], p. 36.
5.Gore, A. 2017. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report 2017. Available
at https://www.discovery.co.za/site/binaries/content/documents/managedcontent/d
iscoverycoza/assets/corporate/investor-relations/integrated-annual-report2017.pdf/integrated-annual-report-2017.pdf/contentdelivery%3Abinary. [Accessed 6
November 2018], p. 5.
6.Gore, A. 2018. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report, p. 5.
7.Discovery Integrated Annual Report 2018, op cit., p. 28.
8.Ibid., p.26.
9.Gore, A. 2017. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report, p. 1.
10.Discovery Integrated Annual Report 2018, op cit., p. 30.
11.Brevis, T. & Vrba, M.J. 2007. Management principles: A contemporary edition for
SAPS. Cape Town: Juta, p. 148.
12.Shevel, A. 2018. Lifetime achiever: A worrier with a positive outlook, In Sunday
Times Top 100 companies, supplement to Sunday Times, November 11. [Accessed 11
November 2018], p. 13.
13.Davis, 2014. What is the fourth industrial revolution? World Economic Forum.
Available at https://www.weforum.org/agenda/2016/01/what-is-the-fourthindustrial-revolution/. [Accessed 10 November 2018].
14.Montresor, F. 2016. The 7 technologies changing your world. World Economic
Forum. Available at https://www.weforum.org/agenda/2016/01/a-brief-guide-to-thetechnologies-changing-world. [Accessed 27 November 2018].
15.Schwab, K. 2016. The Fourth Industrial Revolution: what it means, how to
respond. World Economic Forum. Available
at https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolutionwhat-it-means-and-how-to-respond.[Accessed 27 November 2018].
16.Lehmacher, W., Betti, F., Beecher, P., Grotemeier, C. & Lorenzen, M. 2017. Impact of
the Fourth Industrial Revolution on Supply Chains. World Economic Forum. Available
at http://www3.weforum.org/docs/WEF_Impact_of_the_Fourth_Industrial_Revolution
_on_Supply_Chains_.pdf. [Accessed 30 November 2018].
17.Discovery Integrated Annual Report 2018, op cit., p. 36.
18.Gore, A. 2018. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report, p. 5.
19.Discovery Integrated Annual Report 2018, op cit., p. 30.
20.Ibid., p. 36.
21.Ibid.
22.Gore, A. 2018. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report, p. 6.
23.Discovery Integrated Annual Report 2018, op cit., p. 33.
24.Gore, A. 2018. Review from Adrian Gore Discovery Chief Executive. In Discovery
Integrated Annual Report, p. 5.
25.Discovery. 2018. Our business: Evolution. In Discovery Integrated Annual Report
2018. Available at https://www.discovery.co.za/marketing/integrated-annual-report2018/. [Accessed 5 November 2018].
26.Discovery Integrated Annual Report 2018, op cit., p. 25.
27.This section is based on a discussion of planning, organising and managing a small
business in Byrd, M.J. & Megginson, L.C. 2013. Small business management: An
entrepreneur’s handbook. Seventh edition. New York: McGraw-Hill international
Edition, pp. 126–140.
28.Business Partners. Our unique finance solutions. Available
at https://www.businesspartners.co.za/en-za/finance-solutions/our-financesolutions. [Accessed 7 November 2018].
CHAPTER 8
Organising
Tersia Botha
The purpose of this chapter
Once management has devised a plan to achieve the organisation’s goals, it must deploy
resources such as people, equipment, money and physical resources. In addition, it must
design jobs; assign tasks, duties and responsibilities to people; co-ordinate activities; and
establish lines of communication and reporting. This is called organising. The purpose of this
chapter is to examine organising as the second fundamental function of management. An
overview of the importance of organising is provided, followed by an examination of the
fundamentals of organising. An exposition is given of how an organisation evolves from a
one-person business to a large business organisation with many departments. Authority
relationships as well as reporting relationships are explained, and thereafter co-ordination is
discussed. A brief overview of the informal organisation is also given. Finally, the factors
influencing the design of an organisation’s structure are discussed, and it is emphasised that
such a structure must enable the people concerned to work effectively towards the
organisation’s mission and goals.
Learning outcomes
On completion of this chapter you should be able to:
•explain the concepts of organising and organisational structure
•describe the importance of organising
•discuss the fundamentals of organising
•explain how an organisation evolves from a single-entrepreneur organisation to a large
one
•present viewpoints regarding the factors that influence organising.
8.1Introduction
Planning, the first fundamental function of the management process, is defined as the
setting of goals and the development of a plan of action to achieve the goals as
productively as possible. Thus, planning requires managers to decide where the
organisation should go in future and how to get it there. Planning, however, is only one
function of the management process, and it alone cannot guarantee that the goals of the
business organisation will be accomplished. Once the plan to achieve certain goals has
been selected, management must combine human and other resources, such as money,
machines, raw materials and information or knowledge, in the best possible way to
achieve the organisation’s goals. The most important of these is the task of grouping
people into teams, functions or departments to perform the activities that will convert
the plan into accomplished goals. In the Edcon case study that follows, note the
grouping of people and other resources in three divisions: the Edgars, Jet and Speciality
divisions. The structured grouping and combining of people and other resources, and
co-ordinating them to achieve organisational goals, constitute the second fundamental
element of management: organising.
Organising means that management has to develop mechanisms in order to
implement the strategy or plan. Organising can be defined as the process of delegating
and co-ordinating tasks, activities and resources in order to achieve organisational
objectives. The organising process’s point of departure is the vision, mission, goals and
strategies of the organisation. Arrangements have to be made to determine which
activities will be carried out, which resources will be employed, and who will perform
the various activities in order to achieve the organisation’s vision, mission and goals.
This involves the distribution of tasks among employees, the allocation of resources to
persons and departments, and giving the necessary authority to certain people to
ensure that the tasks are in fact carried out. Above all, there must be communication, cooperation and co-ordination between the people and the departments or sections
performing the tasks. Lastly, a control mechanism should be put in place to ensure that
the chosen organisational structure does, indeed, enable the organisation to attain its
vision, mission and goals.
The organising process leads to the creation of an organisational structure, which
defines how tasks are divided and resources are deployed. Organisational structure can
be defined in the following three ways:
•The set of formal tasks assigned to individuals and departments;
•Formal reporting relationships, which include the lines of authority, responsibility,
the number of hierarchical levels and the span of management’s control; and
•The design of systems to ensure effective co-ordination of employees across
departments.
Ensuring co-ordination across departments is just as critical as defining the
departments to begin with. Without effective co-ordination systems, no organisational
structure is complete.
The set of formal tasks and formal reporting relationships provides a framework for
the vertical control of the organisation. The characteristics of vertical structure are
portrayed in the organisation chart, which is the visual representation of an
organisation’s structure.
In a newly established business, decisions have to be made about equipment,
supplies, processes to be followed and the people who must perform the tasks. In
addition, the structure indicating the distribution of tasks among departments and
individuals has to be drawn up, indicating the responsibilities and lines of authority and
communication. In an existing business, organising has to be constantly reviewed and
adapted to accommodate new strategies, new products and new processes, or any
organisational changes that affect the activities. In line with the strategy or plan,
management still arranges what needs to be done so as to reach the objectives.
The case study that follows illustrates how the principles of organising are applied
to a real-life situation in South Africa.
CASE STUDY: Organising in action: Edgars Consolidated Stores Ltd (Edcon)
Since its founding in 1929, Edgars Consolidated Stores Ltd (Edcon) has established itself as
one of the leaders in South Africa’s clothing, footwear and textile retail arena. Edcon’s retail
businesses are structured (or organised) into three divisions, namely:
1.The Edgars division which serves principally middle- and upper-income markets.
2.The Jet division, including Jet and JetMart and which serves principally middle- to
lower-income markets.
3.The Speciality division, including Edgars Active, Boardmans, CNA, Red Square, and
the various mono-branded stores.
In 2017, various macro-economic changes globally, and in South Africa in particular,
affected Edcon. The real gross domestic product has declined on a year-to-year basis. The
unemployment rate in the country declined to 27,5 per cent in the third quarter of
2018.1 Furthermore, the rand/US$ exchange rate has weakened, and the private sector
credit extension rate (on a year-to-year basis) also deteriorated. All of these factors have
had a negative effect on the disposable income of consumers, creating tight credit
conditions, low consumer confidence, a more restrictive fiscal policy and increased
competition. These factors have, in turn, led to a huge decline in retail sales, forcing the
company to adapt their strategies and structures. For example, Edcon’s balance sheet post
1 February 2017 was no longer laden with debt. They have introduced new ownership,
appointed a new board, and sold the Legit business (including Botswana) effective 29
January 2017. The changes in strategy were followed by changes in structure. Edgars Shoe
Gallery was closed, the company exited non-profitable international brands, and store cost
savings were achieved through the closure of non-profitable trading stores. The company
also introduced a merchandise strategy of rationalising suppliers, rationalising their product
range, introducing fresher inventory and more competitive pricing. This has improved their
customer franchise. An increase in the company’s retail gross profit margin and retail gross
profit was achieved by better input costs, improved negotiated supplier rebates and
discounts as well as a reduction in clearance and promotional markdown.
Source: Compiled from information in Edcon. 2017. Unaudited consolidated results. Q4 and full year 2017.
Available
at www.edcon.co.za/pdf/announcements/2017/2017/Q4FY17-Investor-pres-entationlatest.pdf [Accessed 18 November 2018].
8.2The importance of organising
Organising, like planning, is an integral and indispensable component of the
management process. Without it, the successful implementation of plans and strategies
is not possible because of the absence of a systematic, effective and efficient allocation
of resources and people to execute the plans. Leadership and control are not possible if
the activities of management and employees are not organised, or if the business does
not clearly designate the individuals responsible for specific tasks.
The reasons for the importance of organising in an organisation include the
following points:
•Organising entails a detailed analysis of work to be done and resources to be used
to accomplish the aims of the business. It is through organising that tasks and
resources, and methods or procedures, can be systematised. Everyone should know
their duties, authority and responsibility, the procedures they must follow or the
methods they have to adopt, and the resources they can use. Proper organising
ensures that the joint and co-ordinated efforts of management have a much greater
and more effective result than the sum of individual efforts.
•Organising divides the total workload into activities that can comfortably be
performed by an individual or a group. Tasks are allocated according to the abilities
or qualifications of individuals, thus ensuring that nobody in the business has either
too much or too little to do. The ultimate result is higher productivity.
•Organising promotes the productive deployment and utilisation of resources.
•Related activities and tasks of individuals are grouped together rationally in
specialised departments, such as marketing, personnel or finance departments, in
which experts in their particular fields carry out their given duties.
•The development of an organisational structure results in a mechanism that coordinates the activities of the whole business into complete, uniform, harmonious
units.
Successful organising, then, makes it possible for a business to achieve its goals. It coordinates the activities of managers and their employees to avoid the unnecessary
duplication of tasks, and it obviates possible conflicts. It also reduces the chances of
doubt and misunderstandings, enabling the business to reach its goals efficiently.
Against this background, an examination of the building blocks or the fundamentals of
organising follows.
8.3The fundamentals of organising
Building an organisational structure revolves around the building blocks or the
fundamentals of organising. There are five building blocks or fundamentals of
organising that managers can use in constructing an organisation:
1.Designing jobs
2.Grouping jobs (departmentalisation)
3.Establishing reporting relationships
4.Establishing authority relationships
5.Co-ordinating activities.
8.3.1Designing jobs
The first building block of organisational structure is job design (job analysis, design
and specialisation are discussed in more detail in Chapter 11). Job design is the
determination of an employee’s work-related responsibilities. The job design and
description of a sales manager of the Edgars division of Edcon, for example, would give
a detailed exposition of sales objectives per week, per month and per year.
The point of departure when designing jobs for employees is to determine the level
of specialisation or the degree to which the overall task of the organisation is broken
down into smaller, more specialised tasks. Specialisation is the way in which a task is
broken up into smaller units to take advantage of specialised knowledge or skills to
improve productivity. Job specialisation is normally an extension of organisational
growth. Put differently, the growing business is continually compelled to apply
specialisation or the division of labour. This is illustrated in the Walt Disney Company
case study on page 250.
Job specialisation provides benefits as well as limitations to organisations. Table 8.1
summarises the benefits and limitations of job specialisation.
Although some degree of specialisation is necessary in every organisation, it should
not be carried to extremes because of the possible negative consequences. Managers
should be sensitive to situations in which extreme specialisation should be avoided.
To counter the limitations or problems associated with specialisation, managers
have sought other approaches to job design that achieve a better balance between
organisational demands for productivity, efficiency and effectiveness on the one hand,
and individual needs for creativity and autonomy on the other. Job rotation, job
enlargement, job enrichment and work teams are amongst these alternative
approaches.
Job rotation involves systematically moving employees from one job to another. For
example, a worker in a warehouse might unload trucks on Monday, carry incoming
inventory on Tuesday, verify invoices on Wednesday, pull outgoing inventory from
storage on Thursday and load trucks on Friday. The jobs do not change, but instead,
workers move from job to job. For this very reason, job rotation has not been very
successful in enhancing employee motivation or satisfaction. Jobs that are amenable to
rotation tend to be relatively standard and routine. Job rotation is most often used today
as a training device to improve worker skills and flexibility.
Job enlargement was developed to increase the total number of tasks that a worker
performs. As a result, all workers perform a variety of tasks. It was assumed that this
would reduce the level of job dissatisfaction. Unfortunately, although job enlargement
does have some positive consequences, these advantages are often offset by the
disadvantages. For example, training costs may be higher, unions may argue that pay
should increase because the worker is completing more tasks, and, in many cases, work
remains boring and routine even after job enlargement has taken place.
Job enrichment is a more comprehensive approach than job rotation and job
enlargement. It involves increasing both the number of tasks the worker does and the
control the worker has over the job. To implement job enrichment, managers remove
some controls from the job, delegate more authority to employees and structure the
work in complete units. Job enrichment may also involve continually assigning new and
challenging tasks, thereby increasing employees’ opportunities for growth and
advancement.
Another alternative to job specialisation is work teams. Work teams allow an entire
group to design the work system it will use to perform an interrelated set of tasks. For
example, a work team may assign specific tasks to team members, monitor and control
its own performance, and have autonomy over work scheduling.
CASE STUDY: The Walt Disney Company
The Walt Disney Company is known worldwide for bringing decades of fun and fantasy to
families in the form of animated and live-action motion pictures, amusement parks and
television series. The company was founded as an animation studio on 16 October 1923, the
day that Walt Disney signed a contract with M.J. Winkler to produce a series of Alice
comedies. In those early days, the entrepreneur Walt Disney did all the development work
himself. He wrote cartoons, drew the pictures himself and then marketed his movies to
theatres. As this business grew, he hired additional animators as well as other employees to
perform many of these duties. As the company continued to grow, so, too, did specialisation,
or the degree to which the overall tasks of the company were broken down into smaller and
more specialised tasks. Today, Disney is the largest diversified international family
entertainment and media enterprise.
The Walt Disney Company operates through four primary business units, which it calls
business segments:
1.Studio Entertainment, which includes the company’s film and music recording label
and theatrical divisions;
2.Parks and Resorts, featuring the company’s theme parks, cruise line and other travelrelated assets;
3.Media Networks, which includes the company’s television properties; and
4.Consumer Products and Interactive Media, which produces toys, clothing and other
merchandising based upon Disney-owned properties, and includes Disney’s Internet,
mobile, social media, virtual worlds and computer games operations.
The company employed approximately 199 000 people as of September 2017.
Sources: Compiled from information in The Walt Disney Company. Fiscal Year 2017 Annual Financial
Report.
Available
at https://www.thewaltdisneycompany.com/wp-content/uploads/2017-AnnualReport.pdf [Accessed
18
November
2018];
Walt
Disney
Studios.
History.
Available
at https://studioservices.go.com/disneystudios/history.html [Accessed 13 May 2019].
Table 8.1: Specialisation in the workplace
Benefits of specialisation
Limitations of specialisation
Workers that perform specialised tasks become experts in
performing each task that they have responsibility for.
Workers who perform highly specialised tasks may beco
and feel they need more challenging tasks to perform. T
absenteeism, low morale, conflict, and a lower quality of
If workers perform several different tasks, some time is lost
as they stop doing a particular task and move to the next
one. Specialisation may lead to a decrease in the transfer
time between tasks.
In some cases, it may happen that the time spent on mo
progress from worker to worker is greater than the time
same worker to change from one job to the next. In such
benefits of specialisation are not realised.
The more specialised a job is, the easier it is to develop
specialised equipment to assist with that job.
Specialised equipment is more expensive, and the train
proficient in using this equipment can also be very high.
When an employee who performs a highly specialised job is
absent or resigns, the manager is able to train somebody
new at relatively low cost.
Specialised workers can be hard to replace, and the rep
can also be relatively high.
8.3.2Grouping jobs: Departmentalisation
A second principle or building block of organisational structure is the formation of
departments. While this is a result of specialisation, it also promotes specialisation since
it is necessitated by the logical grouping of activities that belong together. The reasons
for departmentalisation are therefore inherent in the advantages of specialisation, and
the pressure in a growing business to split the total task of management into smaller
units. As soon as a business has reached a given size, it becomes impossible for the
owner–manager to supervise all the employees, so it becomes necessary to create new
managerial positions according to departments based on a logical grouping, in
manageable sizes, of the activities that belong together.
The various departments created constitute the organisational structure of the
business as they appear on the organisation chart. Depending on such factors as the size
and kind of business, and the nature of its activities, various organisational structures
may be developed through departmentalisation.
Some common bases for departmentalisation include the following:
•Functional departmentalisation;
•Product departmentalisation;
•Location departmentalisation;
•Customer departmentalisation; and
•The matrix organisational structure.
8.3.2.1Functional departmentalisation
Functional departmentalisation, as shown in Figure 8.1, is the most basic type of
departmentalisation. Here, activities belonging to each management function are
grouped together. Activities such as advertising, market research and sales, for example,
belong together under the marketing function, while activities concerned with the
production of goods are grouped under operations.
8.3.2.2Product departmentalisation
Product departmentalisation is illustrated in Figure 8.2. Departments are designed so
that all activities concerned with the manufacturing of a product or group of products
are grouped together in product sections, where all the specialists associated with the
particular products are grouped. Edcon applied product departmentalisation by
grouping all of its activities and resources into three divisions. Edcon’s human
resources, financing and marketing needs for the various divisions will differ. For
example, the human resources, marketing and financing needs for the Edgars division
will differ from those needs in the Jet division. This is a logical structure for large
businesses providing a wide range of products or services. The advantages of this
structure are that the specialised knowledge of employees is used to maximum effect,
decisions can be made quickly within a section, and the performance of each group can
be measured easily.
The disadvantages are that the managers in each section concentrate their attention
almost exclusively on their products and tend to lose sight of the products of the rest of
the business. Moreover, administrative costs increase because each section has to have
its own functional specialists such as market researchers and financial experts.
8.3.2.3Location departmentalisation
Location departmentalisation is illustrated in Figure 8.3. This is a logical structure for
a business that manufactures and sells its products in different geographical regions –
for example, Woolworths Holdings Limited, which operates and markets its range of
products all over sub-Saharan Africa, Australia and New Zealand.2 This structure gives
autonomy to area managements, which is necessary to facilitate decentralised
decisionmaking and adjustment to local business environments. This structure is also
suitable for a multinational business.
Figure 8.1: Functional departmentalisation
Figure 8.2: Product departmentalisation
Figure 8.3: Location departmentalisation
8.3.2.4Customer departmentalisation
Customer departmentalisation is adopted particularly where a business concentrates
on some special segment of the market or group of consumers or, in the case of
industrial products, where it sells its wares to a limited group of users. Figure 8.4
illustrates this structure. The structure has the same advantages and disadvantages as
departmentalisation according to product and location or geographical area. A bank, for
example, can have various departments servicing private and corporate clients.
Unlike a functional structure in which activities are grouped according to
knowledge, skills, experience or training, a section based on product, location or
customers resembles, in some respects, a small, privately owned business. It is more or
less autonomous and is accountable for its profits or losses. However, unlike an
independent small business, it is still subject to the goals and strategies set by top
management for the business as a whole.
Figure 8.4: Customer departmentalisation
8.3.2.5Matrix organisational structure
The matrix organisational structure is important because no organisational structure,
whether designed according to function, product, location or customer, will necessarily
meet all the organisational needs of a particular business. Where departments are
formed according to function, there is sophisticated specialisation, but co-ordination
remains a problem. If they are formed according to product, location or customer,
certain products or regions may be successful, but the rest of the business will not reap
the benefits of good organisation. To overcome these problems, which mainly occur in
large businesses and in businesses handling specific projects, the matrix organisational
structure has been created to incorporate the advantages of both structures discussed
earlier. As indicated in Figure 8.5, horizontal (staff) and vertical (line) authority lines
occur in the same structure so that project managers (horizontal) and functional
managers (vertical) both have authority.
Figure 8.5: The matrix organisational structure
This organisational structure is particularly suited to ad hoc and complex projects
requiring specialised skills. For example, IBM created a matrix structure for the
development of its personal computer and disbanded the team when the product had
been launched successfully. However, in other businesses, the matrix structure may be
permanent. An example is a car manufacturer that continually develops certain models
as projects. The major advantage of the matrix structure is that specialist project
managers can help manage complex projects while the advantages of functional
specialisation are retained. The disadvantage is divided authority. Both project leader
and departmental head can exercise authority over the same employees. The unity of
command is therefore affected, and there is a serious risk of soured relations between
the project and functional executives. In addition, the position of employees may be
difficult since they have to satisfy two bosses.
8.3.3Establishing reporting relationships
The third basic principle or building block of organisational structure is the
establishment of reporting relationships among positions. An organisation like Edcon
needs to be able to answer questions such as: Will the marketing manager of Edcon’s Jet
division report to the operations manager, or will the operations manager report to the
marketing manager? Or should both report to the general manager? Furthermore, who
should report to Edcon’s chief executive officer?
The first step in establishing reporting lines is to determine who reports to whom.
Clear and precise reporting lines are important so that everybody knows who is in
charge of which activities. This is called the chain of command. The chain of command
can formally be defined as a clear and distinct line of authority among the positions in
an organisation. The chain of command has two components: the unity of command and
the scalar principle. Unity of command suggests that each person within an organisation
must have a clear reporting relationship to one, and only one, supervisor. The scalar
principle suggests that there must be a clear and unbroken line of authority that extends
from the lowest to the highest position in the organisation. The popular saying ‘the buck
stops here’ is derived from this idea. Someone in the organisation must ultimately be
accountable for every decision.
The second step in establishing reporting lines is to determine how many people
will report to one manager, known as the span of management (also called the span of
control). Figure 8.6 illustrates this concept schematically.
For years, managers and researchers sought to determine the optimal span of
management. For example, should it be narrow (with few employees per manager) or
wide (with many employees per manager)? A narrow span of management will result in
a relatively tall organisational structure, which may mean that managers are being
underutilised and that there is excessive control over employees. A wide span of
management will result in a flat organisational structure, in which it may be difficult to
co-ordinate and control the tasks of a large number of employees. In order to find the
ideal or most appropriate span of management for an organisation, various factors
should be taken into account.
In some organisations, additional factors may influence the optimal span of
management. The relative importance of each factor also varies in different
organisational settings. Hence, managers need to assess the relative weight of each
appropriate factor or set of factors when deciding on the optimal span of management
(also referred to as the ‘span of control’) for their unique situation.
Figure 8.6: The span of management
The span of management
The following factors influence the appropriate span of management:
•The skills, competence and maturity of the supervisor and the employee reporting to
them (the greater the skills, competence and maturity are, the wider the potential span of
management is);
•The physical dispersion of employees (the greater the dispersion is, the narrower the
potential span of management is);
•The complexity of the business (the more complex the business is, the narrower the
potential span of management is);
•The extent of non-supervisory work in a manager’s job (the more non-supervisory work
there is, the narrower the potential span of management is);
•The degree of required interaction between supervisor and the employee reporting to
them (the less interaction that is required, the wider the potential span of management
is);
•The extent of standardised procedures (the more standardised the procedures are, the
wider the potential span of management is);
•The similarity of tasks being supervised (the more similar the tasks being supervised
are, the wider the potential span of management is);
•The frequency of new problems (the more frequently new problems arise, the narrower
the potential span of management is); and
•The preferences of supervisors and employees reporting to them.
Source: Adapted from Griffin, R.W. 2013. Management principles and practices. Eleventh edition. USA:
South-Western Cengage Learning, p. 352.
8.3.4Establishing authority relationships
The fourth building block in structuring organisations is the determination of how
authority is to be distributed among positions. The previous section discussed the
process of task distribution. Here, the broad functions of the business are broken up
into smaller specialised units that are allocated to certain departments and persons.
However, this is not the end point of organising. The assignment of tasks to sections and
members of staff also entails the assignment of responsibility, authority and
accountability to each post in an organisational structure. This further entails the
creation of organisational relations – that is, stipulating the persons from whom
employees receive instructions, to whom they report, and to whom and for what they
are responsible.
Responsibility can be defined as the duty to perform the task or activity as
assigned. Authority, on the other hand, is the right to command or to give orders.
Authority is power that has been legitimised by the organisation. It includes the right to
take action to compel the performance of duties and to discipline default or negligence.
In the formal business structure, several examples of which have been discussed, the
owners of the business possess the formal authority. They appoint directors and give
them authority. These directors in turn appoint managers, who assign a certain
authority to employees who report to them. In this way, authority flows down the line.
Formal authority is distinguished by three characteristics:
•Formal authority is vested in organisational positions, not in people. Managers
have formal authority based on their position in the formal organisational hierarchy.
Other people in the same position have the same authority.
•Formal authority is accepted by employees. Employees comply in an organisation
because they believe that managers have a legitimate right to issue orders.
•Formal authority flows down the vertical hierarchy of an organisation. Positions at
the top of the organisational hierarchy are vested with more formal authority than
positions at the bottom.
An important distinction in many organisations is between line authority and staff
authority, reflecting whether managers work in line or staff departments in the
organisational structure.
8.3.4.1Line authority
Line authority is authority delegated down through the line of command. In Figure 8.7,
the managing director has line authority over the financial, human resource and
marketing managers, while the marketing manager has line authority over the
advertising manager, and so on, down the line of command. The managers in this line
are directly responsible for achieving the goals of the organisation.
8.3.4.2Staff authority
Staff authority is an indirect and supplementary authority. Individuals or sections with
staff authority – for example, the legal adviser and the market-research section shown
in Figure 8.7 – assist, advise and recommend. Their source of authority is usually their
special knowledge of a particular field.
Accountability is the mechanism through which authority and responsibility are
brought into alignment. Accountability means that the people with authority and
responsibility are subject to reporting and justifying task outcomes to those above them
in the chain of command.
For an organisation to function well, every employee needs to know what he or she
is accountable for, and accept the responsibility and authority for performing those
tasks.
Another
important
concept
related
to
authority
relationships
is
delegation. Delegation is the process that managers use to transfer authority and
responsibility to positions below them in the organisational hierarchy. It is important to
note that managers can delegate authority and responsibility, but they will always stay
accountable for the task outcomes.
Just as authority and responsibility can be delegated from one individual to another,
organisations also develop patterns of authority across a wide variety of positions and
departments. Decentralisation is the process of systematically delegating power and
authority throughout the organisation to middle- and lower-level managers. It is
important to note that decentralisation is actually one end of a continuum anchored at
the other end by centralisation, the process of systematically retaining power and
authority in the hands of higher-level managers. Thus, in a decentralised organisation,
decision-making power and authority are delegated as far down in the chain of
command as possible. In a centralised organisation, decision-making power and
authority are retained at the higher levels of management.
Once authority relationships have been completed, management has to design an
organisational structure that will enable the various jobs to be done in a co-ordinated
fashion.
Figure 8.7: Line and staff authority in the organisational structure
8.3.5Co-ordinating activities
The fifth and last building block in structuring an organisation is co-ordination.
Organisation means dividing up the total task of the business into smaller units to
take advantage of specialisation and achieve the goals of the business as productively as
possible. However, this division of work into smaller jobs immediately raises the
problem of co-operation, or the co-ordination of divided tasks and various departments
into an integrated whole to achieve the goals of the business.
The key to keeping each department focused on the organisation’s goals is coordination or the process of linking the activities of the various departments in the
organisation into a single integrated unit. The primary reason for co-ordination is that
departments and groups are interdependent. They depend on each other for resources
in order to be able to perform their activities. The greater the interdependence between
the departments, the more co-ordination the organisation acquires.
In the case of Edcon, the various sections in the Edgars division are interdependent.
Furthermore, all three divisions of Edcon are interdependent. The combined
performance of the three divisions will determine the overall performance of Edgars
Consolidated Stores Ltd.
Without co-ordination, individuals and departments lose sight of the organisation’s
primary goals and of their part in that effort. Co-ordination is the synthesis of separate
parts into a unity and, as such, it is the binding factor in the managerial process. It
means the integration of goals and tasks at all levels, and also the integration of all
departments and functions to enable the business to work as a whole. In addition, an
element of timing is necessary because various smaller tasks have to be scheduled to
mesh with each other.
Hence, co-ordination is an endeavour by management to develop congruence, or
harmony of goals, through organising. Other mechanisms that promote co-ordination
are the organisation chart, the budget, a committee, the broad policy and procedures in
accordance with which tasks are carried out, and the information system of the
business.
Once management has deployed all the building blocks of the organisation, it can
finalise the formal structure of the organisation. Besides the formal organisation of a
business, there is also an informal organisation that often supplements it and helps it to
run smoothly.
8.4The informal organisation
So far, only the formal organisation has been considered. However, relations within a
particular business are not confined to those prescribed by the formal organisation
chart. Alongside the formal structure there is also an informal organisation, which may
be defined as the interpersonal relations between people in a business that are not
defined by the formal organisational structure.
Because there is regular interaction between people, social relations are established
that assume a definite form. This interaction is achieved by informal communication,
also known as ‘the grapevine’. Moreover, these relations exist not only between
individuals, but also between groups, though on an informal basis. If these relations are
sound, they can support the formal structure, but if not, they may include activities that
are not in harmony with those activities envisaged in the formal structure. Rather than
trying to suppress the informal structure, management should encourage it, for the
following reasons:
•Informal communication takes place much more rapidly than formal
communication, and therefore decision-making could be expedited.
•The informal organisation promotes teamwork within departments, as well as cooperation between departments.
•The informal organisation supports the formal organisation.
Having considered the basis of the task of organising, we will now examine some of the
factors that may influence the organisational structure.
8.5Factors that influence organisational
structure
Organising can only be carried out effectively if the organisational structure has been
developed to optimise the execution of strategies and plans. In other words, plans can
only be implemented successfully if the organisational structure makes this possible.
Planning, leading and control are facilitated if management has an effective and
dynamic organisational structure. This raises the question: Which organisational
structure is the best? There is no definite answer. Each business must choose a
structure that is best suited to its particular activities or may be adapted to its strategy
and requirements.
Organising is carried out in a context where many different factors need to be taken
into account. Each of these factors may provide input in the designing of the
organisational structure.
Some experts believe that the environment in which a business operates is a
decisive factor. Others emphasise the connection between strategy and structure.
Obviously, the size and complexity of the business, the competence of its employees,
and the nature of the product and the market all play important parts. Moreover, the
organisational climate or corporate culture should not be ignored in designing the
structure, and in forming departments and distributing tasks. Above all, according to
modern management theory, whichever structure is designed should be adaptable to
changes in the business environment. These factors will now be examined briefly.
8.5.1The environment in which a business operates
The environment in which a business operates was discussed in detail in Chapter 4. The
management environment may be taken as a basis for designing an organisational
structure, since it is the starting point for the development of strategy, on the one hand,
and because the organisational structure is the mechanism that should keep the
business in touch with its environment, on the other. A business has to adapt to its
environment to survive. There are various types of environment.
8.5.1.1Stable environment
A stable environment is one that does not change much or is not subject to unexpected
change. Here, product changes are the exception rather than the rule and, when a
change does occur, plans can be made to cope with it in good time. Demand for the
product is regular, with only slight fluctuations. New technological changes are small or
unlikely. A foundry manufacturing manhole covers and a workshop making violins both
operate in stable environments. In a stable environment, the functional structure is
suitable because there is little in the way of innovation, and no great need for coordination and co-operation between departments. Similarly, businesses with fewer
competing markets, which are under less pressure regarding product development to
satisfy consumers’ needs (for example, a manufacturer of nuts and bolts), will have a
functional structure with few specialists such as market researchers and advertising
experts. Decisionmaking takes place mainly at the top level.
8.5.1.2Turbulent environment
A turbulent environment is one in which changes are the norm rather than the
exception: competitors unexpectedly bring out new products and technological
innovations cause revolutionary changes in the manufacturing process or the product
itself. The pharmaceutical industry is an example of such an environment, which
necessitates many specialists for market research, product development and
production, and close co-ordination and communication between them. In such a
business, departmentalisation according to product is especially suitable, as this speeds
up decision-making. More decisions are made in the separate departments than by top
management. The retail environment in which Edcon operates is a challenging
environment. In the opening case we saw that changes, particularly in the economic
environment, lead to changes in terms of the strategy of the company. Changes in
strategy lead to changes in the structure of the company, which will be addressed in
Section 8.5.2.
8.5.1.3Technologically dominated environment
Technology and technological advancements have an influence on all organisations in
all types of industries. Technology changes the speed and manner in which
organisations conduct and transact business, creating a digital age. The organisational
design for a technologically dominated environment (when a particular technology
forms the basis for a business’s product) will be influenced even more by the level of
technological sophistication. Technologically complex firms tend to have more
managers and more levels of management because specialised technicians work in
small groups with a narrow span. Technology, and especially technological innovation,
requires an adaptable organisational structure that is based on one or other form of
departmentalisation. Apple Inc. serves here as an example. Apple’s structure supports
the company’s strategies aimed for further technological innovation. It maintains a
traditional hierarchy, with some key elements from other types of organisational
structures.3
8.5.2The relationship between strategy and structure
The close relationship between the strategy of a business and its organisational
structure is well known. The implication is that the strategy provides a direct input into
the design of the organisational structure and that the structure cannot be separated
from the strategy. Structure should always follow strategy.
8.5.3The size of the business
It is equally obvious that the structure also depends on the number of employees and
managers to be co-ordinated. An increase in the size of the business also creates a need
for greater specialisation, more departments and more levels of management. The
danger of bureaucratic management as a result of detailed procedures, strict job
demarcation and, consequently, less emphasis on initiative and regeneration is always
present in large businesses.
8.5.4Staff employed by the business
There is also a close relationship between an organisational structure and the
competence and role of staff, whether this competence is a result of training or
experience, availability or attitude. Edcon has established the Edcon Retail Academy,
which provides training related to merchandising and operations to employees. In this
way, Edcon improves the competence of its staff. In management, especially in top
management, the structure influences both the choice of strategy, and the preferences
about how things should be done. Most managers have a personal preference for a
particular organisational structure, for the type of relations with employees, and also
attitudes to formality and authority. As to the latter two, some experts maintain that the
tendency is to move away from the strictly formal bureaucratic structure.
8.5.5The organisational culture
The final factor that plays an important part in organisational design is organisational
culture. This so-called culture is a concept that may be defined as the beliefs and values
shared by people in a business. It is the ‘personality’ of the business. Unless
management analyses this concept correctly, it will never know why employees do, or
do not do, certain things. Corporate culture comprises basic values that are reflected not
only in organisational behavioural patterns, but also in aspects such as the
business’s architecture, office decor, dress regulations and the general way in which
things are done. Edcon’s culture is one of inclusiveness, built on the organisation’s
values of people, integrity, performance and professionalism.
The type of structure that leads to the successful implementation of tasks also
depends on the culture of the business. The structure of a business with a formal culture
will differ from one with a more informal culture.
These factors are some of the considerations that may influence the design of an
organisational structure. They are, however, no more than guidelines for organising. It
should be understood that the organising process is not only used for a new structure.
Any existing organisational structure should be revised whenever the organisation’s
strategy or plans are changed.
8.6Summary
The setting in motion of the planned activities is part of the organising task of
management. Organising is the development of a structure or framework within which
the tasks to be performed for the accomplishment of goals and the resources necessary
for this are allocated to particular individuals and departments. This division of labour
may be done in various ways, and must ultimately be co-ordinated to make concerted
action possible. Someone, however, has to take the lead in setting in motion the
activities involved in the various phases of planning, organising and control. The third
fundamental element of management will be dealt with in Chapter 9.
Small business perspective
Entrepreneurial businesses can be classified as either informal, micro, very small, small,
medium or large organisations. In the National Small Business Amendment Act of South
Africa (No. 26 of 2003), a micro business is defined as a business with five or fewer
employees. A very small business employs between one and ten employees, and a small
business between 11 and 50 employees. Medium and large businesses employ more than
50 employees.
In this chapter, the importance of organising as an integral and indispensable component
of the management process was articulated. Organising is important for every business,
regardless of its size. However, entrepreneurs who start their own businesses, usually on a
smaller scale, will not need formal organisational structures and lines of authority and
reporting in the start-up phase of their businesses. During this phase, the entrepreneur
normally fulfils many (if not all) of the managerial and operational activities him- or herself.
The main aim of the entrepreneur during this phase is to grow the business and to establish
a customer base. Organisational growth can be viewed from various perspectives.
First, the small business will grow financially. It will realise increases in turnover (sales),
profit, assets and return on its investments. Second, the small business will grow in terms of
its maturity – it will implement new processes and procedures, which will lead to an increase
in its effectiveness and efficiency. Third, the small business will grow strategically. The small
business will reassess the environment with the aim of identifying strengths, weaknesses,
opportunities and threats. Last, the small business will make structural changes that fit the
changes to its strategy. As the micro or small business starts to grow, the business will need
more staff. With more staff comes the need for a more formal organisational structure. It is at
this point that the entrepreneur will start delegating many of the managerial and operational
tasks and activities to other people. The role of the entrepreneur then starts to move from
being an innovator and creator of new business ideas, to a small business manager who is
risk-, change- and innovation-averse.
There are dangers at this point of the business’s development. Even though the
entrepreneur may have excellent skills to identify new business ideas and opportunities, he
or she may not have the necessary managerial skills to manage the growing business
effectively. To be successful, the small business manager must be able to:
•perform the management tasks of planning, organising, leading and control;
•organise the growing business in a meaningful manner, applying all the principles of
organising as explained in this chapter;
•ensure co-operation and co-ordination between the various departments and individuals
in the business;
•ensure the effectiveness of groups and teams working in the business;
•facilitate formal communication in the business;
•compile and implement the necessary rules, policies and procedures to ensure that
goals are achieved; and
•manage all programmes and projects towards goals accomplishment.
KEY TERMS
authority
job specialisation
chain of command
location departmentalisation
co-ordination
matrix organisational structure
customer departmentalisation
organisation and culture
departmentalisation
organising
functional departmentalisation
product departmentalisation
job design
reporting lines
job enlargement
responsibility
job enrichment
span of management
job rotation
work specialisation
Questions for discussion
Reread the case study on page 247 and answer the following questions:
1.Do you agree that departmentalisation according to product is the most suitable
organisational structure for Edcon? Substantiate your answer.
2.Identify the various authority relations that could exist in the Edcon group.
3.Do you think that a narrow or high organisational structure would be appropriate
for Edcon? Substantiate your answer.
4.Identify factors that could influence the organisational design of Edcon.
Multiple-choice questions
1.Mrs Mabula, the operations manager of a large organisation, decides to remove
some controls from the jobs that the employees who report to her perform, to
delegate more authority to these employees, and to structure the work in complete
work units. Mrs Mabula is implementing __________.
a.work teams
b.job enlargement
c.job enrichment
d.job rotation
2.In __________, horizontal and vertical authority lines occur in the same
organisational structure so that project managers and functional managers both
have authority.
a.product departmentalisation
b.customer departmentalisation
c.a matrix organisational structure
d.location departmentalisation
3.Which of the following is not one of the fundamentals of organising that
managers can use in constructing an organisation?
a.Designing jobs
b.Grouping jobs (departmentalisation)
c.Choosing a location
d.Co-ordinating activities.
4.The statement ‘product changes are the exception rather than the rule and, when
a change does occur, plans can be made to cope with it in good time’ is associated
with a ____________ environment?
a.turbulent
b.technologically dominated
c.stable
d.politically unstable
5.A small business is defined as having ___________ employees.
a.five or fewer employees
b.between 11 and 50 employees
c.between 1 and 10 employees
d.more than 50 employees
References
1.Statistics South Africa. 2018. Who is most likely to be affected by long-term
unemployment? Available at http://www.statssa.gov.za/?p=11688 [Accessed 5
December 2018].
2.Woolworths Holdings Limited. 2018. Available
at https://www.woolworthsholdings.co.za/ [Accessed 5 December 2018].
3.Panmore Institute. 2018. Apple Inc.’s organizational structure and its characteristics
(An analysis). Available at http://panmore.com/apple-inc-organizational-structurefeatures-pros-cons.
CHAPTER 9
Leading
Mari Vrba
The purpose of this chapter
The preceding two chapters examined the management functions of planning and
organising. While planning and organising set the wheels of the management process in
motion, the process is by no means complete, since the plans must be implemented. It is
here that the leading function of managers becomes crucial. This chapter deals with the
difference between leadership and management, the components of the leading function
and leadership theories. Employee motivation, effective communication and team leadership
relate to leadership effectiveness and the chapter concludes with a brief discussion of these
concepts.
Learning outcomes
On completion of this chapter you should be able to:
•define the term ‘leadership’
•differentiate between leadership and management
•describe the components of leadership
•discuss the major leadership theories
•identify contemporary leadership issues
•explain why managers should understand what motivates their employees’ behaviour
•differentiate between groups and teams in organisations
•describe a simple communication model.
9.1Introduction
If organisations were comprised solely of machines that could implement plans
predictably and with precision, only the planning, organising and control functions of
management would be necessary to achieve an organisation’s goals. However,
organisations employ people to activate the financial, physical and informational
resources of the organisation. Managers perform the function of leading by influencing,
guiding and directing the organisation’s employees towards achieving the goals of the
organisation. In this chapter, we examine the nature of the leading function of
managers.
9.2The nature of leadership
Leadership is one of the most researched and most controversial topics in
management. Many researchers have attempted to define leadership, using variables
such as traits, behaviour, influence, interaction patterns and role relationships, but it
remains an elusive concept.
Sifting through the many definitions for leadership, two aspects of leadership
emerge. First, leadership involves influence, and second, it has to do with the
influence one person exerts over another person or persons. Other aspects of leadership
in an organisational context are that it should be intentional with the purpose of
achieving specific outcomes, and that employees should be willing to follow a leader.1 A
further crucial aspect of leadership is the interdependent relationship between
a leader and his or her followers. Without followers, leaders cannot lead. Employees do
not blindly follow their leaders, even if they are in leadership positions; they must
accept them as leaders to willingly follow them.2 Thus, we can define leadership from an
organisational point of view as the process of influencing employees to work willingly
towards the achievement of organisational objectives.
In the leading function, managers take the lead to bridge the gap between
formulating plans and reaching goals. They transform plans into reality by influencing
individuals, groups and teams in the organisation through communicating with them
and by creating an environment conducive to motivating employees.
9.2.1Leadership and management
Leadership is different from management. Management is broader in scope, comprising
four management functions, of which leading is one. People can work as managers
without being true leaders because they do not have the ability to influence others.
Conversely, there are leaders in organisations who are not managers. For example, the
informal leader of a group may have more influence in the group than the manager
because of his or her ability to influence group members.
Influencing3 is the process leaders follow when communicating ideas, gaining
acceptance of them, and inspiring followers to support and implement the ideas
through change. Influencing is also about the relationship between leaders and
followers. Managers may coerce employees to influence their behaviour, but leaders do
not.
In the challenging global business environment of the 21st century, organisations
need managers who are also strong leaders. Figure 9.1 illustrates the process of
developing managers into leaders.
Figure 9.1: The integration of leadership and management
While leadership is not the only component of organisational success, it is an
important contributing variable. Indeed, in the South African business context, there are
many examples of exceptional business leaders of successful organisations. One
example is the Group Chief Executive Officer (CEO) of Discovery, Adrian Gore, who
founded and built Discovery into one of South Africa’s most successful organisations. Mr
Gore has received many awards for his contributions to South African business and
society, as described in the case study that follows.
CASE STUDY: Discovery Limited
Adrian Gore, Group Chief Executive Officer of Discovery, is known for his stance on positive
leadership. In November 2018, he made a speech which was widely quoted in the media
because it was so different in content from the bad news South Africans are subjected to on
a daily basis. It was a plea for a better, fairer nation, based on the exactness of science. The
occasion was the 2018 Discovery Leadership Summit, a global thought leadership event
with the aim to provide a platform for some of the world’s most brilliant thinkers to share their
leadership strategies and insights on issues relating to business, economics, government
and science.4 Mr Gore also penned an article in the Business Day newspaper on the same
topic.
In short, he made the case for positive leadership in South Africa on all levels. He wrote,
‘I’m known for repeatedly making the call for positive leadership, to liberate our country’s
incredible potential. What fascinates me is the criticism I receive for my naivety given the
challenges we face. I’m not discounting the fact that we are faced with real challenges, we
do: GDP growth is at -0,7 per cent; half of those aged between 15 and 35 years old are
jobless; we have a bloated public-sector wage bill and a hefty budget deficit to fill; and tragic
inequality. My plea for positivity is not despite these challenges, but because of them – and it
is rooted in cold hard facts’.5
The ‘optimum paradox,’ which is the gap between private hope and public despair, forms
the basis of his ideas. He cited the work of Nobel prize-winning behaviour economist Angus
Deaton as evidence for the fact that people believe, in their personal lives, that their future
will be better than their past (the optimism bias). In contrast, they believe that the world (and
the country) is on an irreversible downhill course (declinism). Mr Gore argued that the major
flaw in declinism is the failure to distinguish between absolute and relative changes and to
misinterpret relative decline as absolute decline.
It is a fact that South Africa, like the world at large, is essentially a better place as time
progresses. Mr Gore quoted factual evidence to prove this, including the following: South
Africa’s GDP is 2,5 times the size it was in 1994 on a dollar basis; formal housing increased
by 131 per cent (from 1996 to 2016); new HIV infections went down by 60 per cent from
1999 to 2016; and the murder rate per 100 was down 50 per cent from 1994 to 2017. The
South African economy is substantial: in terms of stocks traded in 2017, the country trumps
the Middle East, the Eastern and Northern African regions, Singapore and Norway. The
country holds 82 per cent of the pension fund assets in Africa, 18 times that of Nigeria.
South Africa’s market enables the building of huge companies, for example Discovery’s
revenue footprint is more than half of that of Mauritius and both Standard Bank and First
Rand are bigger than all Nigeria’s banks combined on a tier one capital basis. The economy
is also relatively stable and not too risky to invest in. The GDP growth is the lowest in
volatility when compared to other BRICS countries (from 1994 to 2017), suggesting that we
misplace risk and thus miss opportunities. He described the country as a place of
opportunity and a huge market‚ which is why Discovery has grown into a global business.
According to Mr Gore, South Africans see problems as unsolvable and believe that the
decline of the country is unavoidable. They do not acknowledge the positive aspects in the
country because they are obsessed with the problems of the day. Before 2005 it was HIV
and AIDS; in the early 2000’s it was serious crime, followed by xenophobia in 2008 and the
Eskom power crisis; from 2016 we concentrated on #FeesMustFall, state capture and land
expropriation. These problems are not inflexible, because they change over time. Although
the problems are serious and tragic, South Africans have the ability to manage them. The
country has remarkable potential, but it needs to deliver economic growth to solve its
problems.
Thus, in Mr Gore’s view, South Africans have a choice: a problem-centric leadership
approach, by perpetrating declinism, or a vison-based leadership approach, which is the
solution to declinism. A vision-based leadership approach involves recognising the country’s
progress and creating hope. South Africans need to see the country’s problems as real, but
solvable, and they should seek the positive signals next to the negative ones in the
environment. Furthermore, they need to acknowledge the potential of the South African
economy and invest in it – this is how change happens.
Mr Gore behaves in the way in which he encourages others to behave. Discovery has
been investing in South Africa since 1992, when as a young actuary working at Liberty, he
perceived the health-care market as unsustainable, and in this he saw an opportunity. ‘When
my colleagues and I started out, we knew that the case for disruption was strong. Insurance
models at the time did little to recognise the behavioural nature of risk, let alone actively
promote and incentivise better health. Life insurance systems were based on the idea that
risk is static, with underwriting taking place once, at policy inception. It made no sense as an
approach. In fact, it was predicated on death, and not – ironically – on life. That’s how the
Vitality business model was born. We knew we could harness the behavioural biases and
heuristics that typically conspired against health improvement to help nudge people in the
right direction – making healthier choices the easier choices. We also knew if our core
purpose was to make people healthier, and enhance and protect their lives – the same core
purpose that governs us today – we could align our commercial interests with making society
healthier. That is a profound opportunity.’6
Discovery has since overhauled health care in South Africa and changed the insurance
landscape in the country. It is rolling out its Vitality Shared-Value Insurance model globally
with foreign insurance giants. In March 2019, Discovery will launch its bank, based on the
same model; linking behavioural science and technology, and connecting the two
megatrends to banking. Discovery’s entry into banking is bound to shake up the industry
because of its innovative plan to ‘democratise the best interest rates to people who are
managing their money best.’7 Mr Gore described it as ‘the world’s first behavioural bank’.8 A
Discovery Bank client who manages his or her money responsibly and effectively, regardless
of how much money the person has, will be charged the lowest interest rates in the market.
Asked about his leadership style, Mr Gore explains, ‘Leadership is about vision and
driving people to a goal. Framing it, drawing it, illustrating it.’9 One of the characteristics of a
good leader, is the ability to instil hope, inspiration and a sense of possibility among people –
and to do so authentically. He attributes the success of Discovery not only to his leadership,
but also to an effective team, who have built the organisation over the years. Leadership
skills can be learnt as no one leadership style is necessarily right. In his opinion it is
important to be authentic to who you are. At the same time, you can identify your
weaknesses and work on them. He believes that entrepreneurship is the only solution to the
country’s unemployment problem, and mentorship provides the most powerful support for
entrepreneurs. When entrepreneurs start a business there are aspects that they have never
experienced or even considered. Many entrepreneurs think they do not need a board as it is
a waste of time, but Mr Gore is convinced that having smart, experienced people help you is
a gift that you should accept with gratitude.
Discovery has come a long way, but its CEO thinks that there is a great deal yet to build.
He has a vision to implement the Vitality Shared-Value Insurance model beyond its 19
current markets. The process is still in its primary stage and has a long way to go (See case
study in Chapter 7 for a discussion of Discovery’s vision for 2021.)
Adrian Gore graduated from Wits University in 1986. He is a fellow of the Actuarial
Society of South Africa, a fellow of the Faculty of Actuaries (Edinburgh), an associate of the
Society of Actuaries (Chicago), and a member of the American Academy of Actuaries. In
1998, he was recognised as South Africa’s Best Entrepreneur by Ernst & Young, and in
2004 was chosen as South Africa’s leading CEO in the annual Moneyweb CEO’s CEO of the
Year Awards. In 2008 he received the Investec Award for Considerable Contribution in a
Career/Profession, and in 2010, was named the Sunday Times Business Leader of the Year.
In 2015 Mr Gore was the recipient of the McKinsey Geneva Forum of Health Award. At the
2016 All Africa Business Leaders Awards (AABLA), in partnership with CNBC Africa, he was
honoured as the Business Leader of the Year. On behalf of Discovery he also accepted the
Company of the Year award, recognising the group’s continuing commitment to excellence
and outstanding business values, which have impacted business on the continent. In 2018,
he received the Sunday Times Top 100 Companies Lifetime Achiever Award. He chairs the
South African chapter of Endeavor – a global non-profit organisation that identifies and
assists high-growth entrepreneurs. He sits on the World Economic Forum Global Health
Advisory Board, which is committed to improving global healthcare and on the
Massachusetts General Hospital Global Health Advisory Board, whose mandate is to
enhance care for the world’s most vulnerable populations, as well as to educate and prepare
the next generation of health leaders and educators.
Sources: Gore, Adrian. 2018. My plea for imagining a better, fairer nation is based on hard, cold science.
In Business Day, Friday 2 November, p. 9.; Shevel, A. 2018. A worrier with a positive outlook. In Sunday
Times Top 100 Companies, Supplement to Sunday Times, 11 November, pp. 12-13.; Discovery Leadership
Summit 2018. Available at https://www.discoveryleadershipsummit2018.co.za. [Accessed 17 November
2018]; Business Leadership South Africa: Adrian Gore. Available at https://www.blsa.org.za/about-us/theboard/adrian-gore. [Accessed 17 November 2018]; Pittman, J. 2014. Adrian Gore: The disruptor.
In Entrepreneur
Magazine.
Available
at https://www.entrepreneurmag.co.za/advice/successstories/entrepreneur-profiles/adrian-gore-the-disrupter. [Accessed 17 November 2018]; Mashego, P. &
Thukwana, N. 2018. Discovery promises brave new bank world. In Business Times, Sunday Times, 18
November, p. 7.
9.2.2The components of the leading function
In Chapter 8, we discussed organisational structures and the authority relations they
create in organisations. These authority relations relate strongly to the leading function
of managers because the leading function gives managers the right to use authority,
power, responsibility, delegation and accountability to influence employees to achieve
the organisation’s goals.
The components of leadership entail the following:
•Authority denotes the right of a manager to give commands to, and demand
actions from employees.
•Power is a manager’s ability to influence the behaviour of employees.
•Responsibility is the obligation to achieve organisational goals by performing
required activities. Managers are responsible for the results of their organisations,
departments or sections.
•Delegation is the process of assigning responsibility and authority for achieving
organisational goals. Managers delegate responsibility and authority down the chain
of command. Delegation refers to giving employees new tasks. Such a task may
become part of a redesigned job or may simply be a once-off task.
•Accountability is the evaluation of how well individuals meet their
responsibilities. Managers are accountable for all that happens in their sections,
departments, business units or organisations. Managers can delegate authority and
responsibility, but they can never delegate their accountability.
9.2.2.1Authority
Managers are responsible for ensuring that employees work together to achieve the
organisation’s goals. Without authority, managers are unable to manage, initiate or
sustain the management process. Authority therefore revolves around obtaining the
right to perform certain actions (within specified guidelines) to decide who does what,
to demand the completion of tasks and to discipline those who fail to do what the
organisation expects of them. In short, this entails the right to demand action from
employees and the right to act.
Final authority rests with the owners or shareholders of an organisation, who
transfer or delegate authority to the board. The board, in turn, delegates authority to
top management, top management delegates it to middle management and so on, to the
lowest levels. Managers, in turn, delegate authority to employees to enable them to
execute tasks. For example, certain managers have the authority to release purchase
orders in the organisation’s name, and others have the authority to negotiate and
conclude contracts on behalf of the organisation. The organisation confers this formal
authority on them.
When organisations confer authority to managers, they have the right to expect
action from employees. Members of organisational groups also confer authority on a
manager if they accept him or her as their leader. Authority and leadership are
therefore closely related – the organisation grants authority to managers to lead
individuals and groups in achieving the organisation’s goals.
9.2.2.2Power
Leading and power go hand in hand. Without power, a manager might not be able to
influence and lead employees towards achieving organisational goals.
Managers have two types of power: position power and personal power. Top
management delegates position power down the chain of command. Managers
have personal power when their followers bestow it on them. The chief executive
officer of a company, such as Mr Adrian Gore of Discovery, has both position and
personal power.
Figure 9.2: The power continuum
Source: Adapted from Lussier, R.N. & Achua, C.F. 2001. Leadership: Theory, Application, Skill
Development. First edition. Mason, OH: South-Western Cengage Learning, p. 342. © South-Western, a
part of Cengage Learning, Inc.
Figure 9.2 depicts the different sources of power on a continuum from position power
to personal power.
•Coercive power is the power to enforce compliance through fear, whether
psychological, emotional or physical. Modern organisations do not use physical
force, but employees’ psychological or emotional fear, for example, that the
organisation will retrench them or exclude them from a specific group, gives
managers a form of power that he or she can use to put pressure on employees to
comply.
•Reward power is based on the manager’s ability to influence employees with
something of value to them. It concerns the power to give or withhold rewards. Such
rewards include, for example, salary raises, bonuses, praise, recognition and the
allocation of interesting assignments. The more rewards a manager controls and the
more value employees place on these rewards, the greater the reward power a
manager possesses.
•Legitimate power is the power an organisation grants to a position. Accordingly, a
manager has the right to insist that employees do their work and the right to
discipline or dismiss them if they fail to comply.
•Referent power refers to a manager’s personal power or charisma. Employees
obey managers with referent power simply because they like them, respect them
and identify with them. In other words, the leader’s personal characteristics make
him or her attractive to others.
•Expert power is the power a manager accrues because of his or her expertise,
knowledge and professional ability, particularly over those who need the knowledge
or information. The more important the information and the fewer the people who
possess it, the greater is the power of the person who commands it.
A manager who commands all five types of power is a strong leader. In organisations,
managers are not the only ones to possess power. Employees also have power, for
example, when a manager is dependent on an employee for information, expertise, or
for social influence or because of the employee’s extensive social media network both
inside and outside the organisation. Individuals accrue power unrelated to their
position in the organisation because they obtain information from their social networks,
which they can use to take action. For example, an employee is privy to information
intended for top managers only, but it was posted on a WhatsApp group by someone
who (perhaps unethically) saw a confidential memo. This information has a direct
bearing on both the employee’s and her manager’s careers, but the manager is unaware
of it. Thus, the employee has the power to share or withhold the information from the
manager, or to take action to secure her own position.
Factors determining the strength of an individual’s social network include the size of
the network (access to information from many sources), the number of contacts
between the individual and key decision makers in the organisation, and the variety of
contacts in the individual’s network (contacts, including people in various departments
and positions in the organisation and outside of its boundaries with key contacts,
provide access to a wider range of information).
Managers should be aware that their employees also possess power. They should
use their own power judiciously to accomplish the organisation’s goals.
Effective managers use their power to maintain a healthy balance between their
own power and that of employees as Figure 9.3 illustrates.
Figure 9.3: Equilibrium between the power of management and that of employees
9.3Leadership theories
Researchers have studied, developed and tested a variety of leadership theories to
determine the key characteristics and behaviour patterns of a good leader.
9.3.1Traditional approaches to leadership10
The major traditional leadership theories are trait theory, behavioural theory and
contingency theory. Although researchers developed these theories many decades ago,
they still have relevance because they provided the theoretical framework for further
research, and the development of more contemporary approaches to leadership.
9.3.1.1Trait theory
Early research into leadership involved the identification and analysis of the traits of
strong leaders. The assumption of trait theory was that strong leaders have certain
basic traits that distinguish them from followers and unsuccessful leaders. Many
researchers have tried to list the distinctive characteristics of effective leaders.
The results of these studies have been largely inconclusive because traits vary from
one leader to another, and some traits develop only after a leader assumes a leadership
position.
9.3.1.2Behavioural theory
The interest of leadership researchers then turned towards investigating how
successful leaders behave. An assumption of behavioural theory was that successful
leaders behave differently from unsuccessful leaders. Researchers tried to determine
what successful leaders do – how they delegate, communicate with, and motivate their
employees. The belief was that managers could learn the ‘right’ behaviour.
Research conducted at the University of Iowa, the Ohio State University, the
University of Michigan, and the work of Blake and Mouton support the behavioural
approach to leadership.
Researchers at the University of Iowa identified three basic leadership styles,
namely autocratic, democratic and laissez-faire leadership styles. The researchers
concluded that the laissez-faire style, whereby leaders leave all decisions to their
employees and do not follow up, was ineffective on every performance criterion when
compared to the other two styles. The researchers found that the democratic leadership
style (the style of a leader who involves employees in decisionmaking, delegates
authority, encourages participation in deciding work methods and goals and gives
feedback) was the most effective style.
Researchers at the Ohio State University also identified two leadership
styles: Initiating structure is the extent to which a leader defines and structures his or
her role, and the roles of employees to attain goals. Consideration is the extent to which
a leader has job relationships characterised by mutual trust, respect for employees’
ideas and regard for their feelings. According to the researchers, effective leaders
exhibit both dimensions strongly in their leadership style.
At the University of Michigan, researchers distinguished between productionoriented leaders, who emphasise the technical or task aspects of a job, and employeeoriented leaders, who emphasise interpersonal relations. In these studies, employeeoriented leaders were associated with higher group productivity and higher job
satisfaction.
The researchers Blake and Mouton developed the managerial grid, an instrument
that identifies various leadership styles on a two-dimensional grid. They used a
questionnaire to measure concern for people and concern for production on a scale of
one to nine. The researchers identified the ‘ideal’ leadership style as the teammanagement style, where a manager is strong on both dimensions (9,9).
In general, the behavioural theories had little success in identifying consistent
patterns of leadership behaviour and successful performance because results varied
over different ranges of circumstances. This led researchers to investigate the effect of
the situation on effective leadership styles.
9.3.1.3Contingency or situational theory
The contingency (or situational) approach to leadership acknowledges that predicting
leadership success is more complex than examining the traits and behaviours of
successful leaders. Contingency theory attempts to determine the best leadership style
for a given situation. In the development of contingency theories, researchers
considered variables such as how structured the task is, the quality of the relationship
between the leader and the employees, the leader’s position power, the employees’ role
clarity and the employees’ acceptance of the leader’s decisions.
Fred Fiedler’s contingency theory of leadership proposes that effective group
performance depends on the proper match between a leader’s style of interaction with
employees, and the degree to which the situation gives control and influence to the
leader. Fiedler developed an instrument to measure whether the leader is task
oriented or relationship oriented, and he identified three situational criteria that
organisations can manipulate to create a proper situational match with the behaviour
orientation of the leader. According to Fiedler, an individual’s leadership style is fixed.
If, for example, a situation requires a task-oriented leader and the person in the
leadership position is relationship oriented, the organisation must either change the
situation or move the leader to another situation where his or her leadership style is
compatible with the situation.
Robert House developed the path-goal model, asserting that it is the leader’s
responsibility to help employees to achieve their goals. Leaders should provide the
necessary direction and support to ensure that employees’ goals are in line with the
organisation’s goals and objectives. House identified four leadership
behaviours: directive, supportive, participative and achievement-oriented behaviour,
which managers can use in different situations. Most of the research evidence supports
the logic of this theory: if the leader counteracts the employee’s limitations in the work
situation, this will probably influence the employee’s performance positively.
Paul Hersey and Ken Blanchard proposed a situational leadership model where
the premise is that the work maturity of employees determines the best leadership style
for a particular situation. The employees’ need for achievement, their willingness to
accept responsibility, their task-related ability and their experience determine
their work maturity. The manager uses one of four leadership styles: telling, selling,
participating or delegating to match the employees’ maturity level in any given
situation.
9.3.2Contemporary approaches to leadership
In the aftermath of the worldwide financial crisis, where many business leaders stood
accused of violating the trust of their employees and other stakeholders, it is vital that
employees and stakeholders in organisations perceive their business leaders as
trustworthy. In recent years, the exposure of large-scale fraud and corruption in both
the public and private sectors in South Africa has shocked South Africans. Leaders from
both sectors need to work hard to restore the public’s trust in them.
Being trustworthy is key to leadership success and an essential component of
successful working relationships between leaders and followers. A leader that is
considered trustworthy enables co-operation, encourages information sharing, and
increases openness and mutual acceptance with the people he or she manages. Trust is
‘the extent to which an individual is perceived to demonstrate ability, benevolence, and
integrity’.11 Distal trust (trustworthiness of the organisation’s senior or strategic
leaders) and proximal trust (trustworthiness of a person’s immediate manager) are two
elements of trustworthiness.
The five dimensions of trust are the following:
1.Integrity (a manager’s honesty and truthfulness).
2.Competence (a manager’s technical and interpersonal knowledge and skills).
3.Consistency (a manager’s reliability, predictability and good judgement in
handling situations).
4.Loyalty (a manager’s willingness to protect another person).
5.Openness (a manager’s reliability when it comes to telling the whole truth).12
Management literature often refers to leaders as individuals who define organisational
reality through the articulation of a vision. However, this view of leadership does not
only apply to top managers. Managers at all levels are stronger leaders if they can
convey the vision of their organisation, business unit, department, group or team to
their employees. Visionary leaders, charismatic leaders, transformational leaders and
agile leaders all communicate and share their visions in their organisations.
9.3.2.1Charismatic leadership
The perception is that a strong positive relationship exists between charismatic
leadership and the employees’ performance and satisfaction. Charismatic leaders often
have traits such as self-confidence, vision, the ability to articulate the vision, strong
convictions about the vision, unconventional behaviour and environmental sensitivity.
Charismatic leadership may be most appropriate when the followers’ task has an
ideological component, perhaps explaining why charismatic leaders most often appear
in politics, religion or unusual business organisations.
9.3.2.2Visionary leadership
Visionary leadership goes beyond charisma. Visionary leaders can create and
articulate a realistic, credible and attractive vision of the future of the organisation; this
vision grows out of, and improves on, the present. Such a vision creates enthusiasm and
brings energy and commitment to the organisation. Visionary leaders exhibit certain
skills: the ability to explain the vision to others, the ability to express the vision through
their behaviour, and the ability to extend the vision to different leadership
contexts.13 The case study on Discovery in Chapter 7 describes how the company’s
vision drives its strategy and performance. In the case study at the beginning of this
chapter, Mr Gore explains what he thinks good leadership entails (see case study).14 He
explains that in the broader context of South Africa, leaders across the spectrum, from
public to private sectors, have a choice: a problem-centric leadership approach,
perpetrating declinism, or a vison-based leadership approach. A vision-based
leadership approach involves recognising problems as real, but solvable, and looking for
the positive signals (next to the negatives) in the environment.
9.3.2.3Transactional and transformational leadership15
James Burns was the first researcher to distinguish between transactional and
transformational
leadership
behaviour.
According
to
him, transactional
leaders motivate followers by appealing to their self-interest – for example, corporate
leaders exchanging pay and status for the work effort of employees. He contrasts
transactional leadership with transformational leadership, which he describes as a
process in which ‘leaders and followers raise one another to higher levels of morality
and motivation’.16 Bass17 further refined the distinction between transactional and
transformational leadership by proposing a theory of transformational leadership. He
describes transactional leadership as an exchange of rewards for compliance, while he
views transformational leadership as the leader’s effect on followers in that they feel
trust, admiration, loyalty and respect for their leader, and they to do more than what the
organisation expects of them.
Transformational leaders display behaviour associated with four transformational
styles: idealised
behaviour,
inspirational
motivation,
intellectual
stimulation and individualised consideration, and a fifth characteristic, based on the
other four leadership styles – idealised attributes.18
In most organisational contexts, transformational leadership is desirable because it
improves employee satisfaction, trust and commitment, and results in motivated
employees doing more than is expected of them.19 Research findings indicate that
transformational leadership consistently promotes greater organisational
performance.20 Furthermore, transformational leaders are effective in organisations
where major change and transformation are taking place.
Transformational leaders possess the unique qualities suited to lead in the Fourth
Industrial Revolution (4IR), characterised by a fusion of technologies, blurring the line
between the physical, digital and biological domains. Markers of the 4IR are technology
breakthroughs in several fields such as robotics, artificial intelligence (AI),
nanotechnology, quantum computing, biotechnology, the Internet of Things, fifth
generation wireless technologies (5G), additive manufacturing or 3D printing and fully
autonomous vehicles. Because of massive change, organisational design, development
and governance have entered a challenging new phase. Strategic transformation and
change have become inevitable and demand the introduction of new business models,
led by transformational and agile leaders (see Section 9.3.3.6). The development and
promotion of a vision is critical and key to the transformational leader being able to
move human talent in a preferred direction.21
9.3.2.4Emotional intelligence (EQ) and leadership and transformational
leadership22
Salovey and Mayer were the first researchers to use the term ‘emotional intelligence’
(EQ). They define EQ as ‘the ability to monitor one’s own and others’ feelings and
emotions, to discriminate amongst them and to use this information to guide one’s
thinking and actions’.23
Daniel Goleman’s conception of EQ has moved beyond the original definition of
Salovey and Mayer to include emotional competencies in the workplace. He defines
emotional competencies as ‘a learned capability based on emotional intelligence
resulting in outstanding performance at work’.24 EQ determines the potential of a
person for learning the practical skills that underpin four emotional intelligence
clusters. Emotional competence indicates how much of that potential a person realised
by learning and mastering skills and translating intelligence to capabilities to do a job.
Goleman’s emotional competence inventory (ECI) involves 20 competencies that
distinguish individual differences in work performance. The competencies support four
clusters of general EQ skills: self-awareness, self-management, social awareness and
relationship management. The results obtained in a wide range of studies, where the
researchers used the ECI instrument to assess people at all levels, in a wide range of
organisations across diverse industries, indicate that each competence has a significant
impact on performance. Commenting on the relationship between leadership and EQ,
Goleman said the evidence suggests that emotionally intelligent leadership is key to
creating an organisational climate that develops and supports employees and
encourages them to give their best.25
9.3.3New approaches to leadership
Interest in leadership theory and practice has intensified during the last decade as
leaders face new issues and challenges emerging from the enormous changes taking
place in the business environment. We examine the following approaches: ethical
leadership, cross-cultural leadership, managing diversity, servant leadership, peer-topeer leadership, and agile leadership.
9.3.3.1Ethical leadership
Ethical leadership is a prerequisite for effective leadership and entails the expectation
that top managers should maintain high ethical standards for their own conduct,
demonstrate ethical behaviour consistently, and hold all members of their organisations
to the same high ethical stand. Furthermore, ethical leadership in governments,
international institutions and in global and local business organisations will be of
crucial importance as the Fourth Industrial Revolution takes hold in the world.
The founder and executive chairman of the World Economic Forum, Klaus Schwab,
says the development of new technologies causes a widening gap between progress and
society’s ability to cope with its consequences. Whether it is an impending shift in the
nature of work as technology changes production systems, or the ethical implications of
re-engineering and what it means to be human, the changes threaten to engulf us if we
do not join forces to understand and direct them. New business models as well as
ethical, safety and social issues appear as new technologies emerge. Nevertheless, we
have not collectively solved some of the most basic questions on critical issues such as
the ownership of personal data, security of social infrastructure and systems, and the
rights and responsibilities of the new leaders of the business environment. ‘Leadership
in these complex times requires nothing less than a wholesale shift of our mental
models, a step change in collaborative engagement, and the ability to collectively
envisage the futures that we want to create, and manage ourselves away from the
dystopias which technological progress can conjure.’26
9.3.3.2Cross-cultural leadership
Cross-cultural leadership skills are crucial for leaders operating in a global
environment where they must deal with people from different cultures in different
parts of the world. Leaders should have a strategic awareness and an interest in the
socioeconomic and political aspects of the countries where the organisation operates. A
prerequisite for cross-cultural leadership is outstanding interpersonal skills, including
cross-cultural verbal and nonverbal skills and trustworthiness. Flexibility, an
acceptance of uncertainty and frustration, and an awareness of one’s own prejudices are
essential skills for cross-cultural leadership. Furthermore, cross-cultural leadership
necessitates interest in different cultures and a willingness to adjust one’s own
behaviour to accommodate cultural values and norms other than one’s own. Crosscultural leaders should acquire the skill to keep quiet and listen to others.27
9.3.3.3Managing diversity
In organisations worldwide, and specifically in South Africa, the workforce is
increasingly diverse in terms of demographics. Organisations also form non-traditional
relationships with employees, by engaging in flexible working arrangements with, for
example, full-time contract workers, independent contractors, part-time workers,
home-based teleworkers and disabled workers. To accommodate a flexible workforce,
organisations need to develop a variety of career paths and incentive systems. When the
workforce is heterogeneous in terms of race, gender and ethnicity, organisations can
benefit from a diversity of perspectives and approaches to problem solving but should
also be proactive to prevent undue conflict. When diversity is not managed properly,
there is the potential for interpersonal conflict and difficult communication. The
development of conflict resolution systems are crucial in this regard. The role of leaders
is to be role models, and to develop the skills in their organisations for valuing diversity,
such as diversity training and listening skills. Another management challenge relating to
diversity is that organisational culture should change in terms of values, rituals and
assumptions in organisations where the current culture does not support the
heterogeneous values of the diverse groups representing the workforce.
9.3.3.4Servant leadership
While servant leadership is a timeless concept, Robert K. Greenleaf28 coined the phrase
in The Servant as Leader, an essay first published in 1970. In this essay, Greenleaf
explained that the servant leader is servant first, in contrast to the person who is leader
first. These two leaders are opposite types on a continuum comprising combinations of
the infinite variety of human nature. A servant leader focuses mainly on the growth and
well-being of people and the communities to which they belong. Servant leadership
differs from traditional leadership, which often involves a leader accruing and using
power. In contrast, the servant leader shares power and puts the needs of others first.
The servant leader helps people to develop and perform to the best of their ability.
Greenleaf’s explanation of the difference between servant leaders and other leaders
lies in the care taken by the servant leader to ensure that other people’s highest priority
needs are addressed. Greenleaf extended his ideas to organisations, recognising that
organisations could be servant leaders as well. In his opinion, servant-leader
organisations could change the world. The servant-leadership philosophy and practices
can apply in many contexts. A surprising number of high-profile management theorists
advocate servant leadership, including Ken Blanchard, Stephen Covey, Peter Senge, M.
Scott Peck and Margaret Wheatley.
9.3.3.5Peer-to-peer leadership29
Peer-to-peer leadership is effective in organisations using an interconnected central
network. The concepts of the node (an individual computer in a network), nodecommunity (all the computers in a network), equipotency, (all nodes in a node
community on equal footing) and relational dynamics (the interaction between nodes)
frames a new concept, that of peer-to-peer leadership.30 The work of a manager in an
equipotent organisation is to set overall goals, provide direction and ensure that the
network functions well, but not to tell the node community what to do. In the node
community, leadership roles shift rapidly to fit the needs of a given situation.
Information flows freely and those who need it can find it and act on it immediately.
Feedback becomes an organic part of the workflow and corrections take place
immediately. Peer-to-peer leadership is a new way to provide leadership in
organisations by using technology and the interconnectedness of a network, where
everyone is a sender and a receiver and a leader and a follower, to attain the goals of the
organisation.
9.3.3.6Agile leadership
Agile leadership is the ability of a leader to be able to lead in a wide range of
circumstances especially in new, changing and ambiguous situations. Agile leaders use
uncertainty to find opportunity. They tend to be obsessive learners and talented
innovators who have the ability (and agility) to operate in any system of thinking, and to
see issues from the perspectives of others. It is this ability to think in a number of
different ways that gives such leaders their agility.31
In an age of rapid change, admitting that you do not have all the answers, is a
strength and not a weakness. Agile leaders32 are willing to learn and they are humble.
They gather input from both inside and outside the boundaries of their organisations,
and they trust those who know better than they do. Change is constant, and when new
information becomes available the agile leader adapts. Rapid technology changes and
the appearance of new digital competitors drive agile leaders’ adaptability. They are
experts at dealing with complexity and are willing to change their minds when
presented with new information.
Being a visionary leader in the context of agile leadership means creating a
compelling, genuine vision and sharing it extensively in the organisation, creating a
common identity and sense of destiny. In times of rapid technology, disruption of
business models and new opportunities emerging, a clear vision is critical for the
organisation to succeed. Discovery’s Mr Adrian Gore is an agile leader and a visionary
leader. He is globally recognised as an innovative thinker, and Discovery’s model is
disruptive in a range of industries and markets.
Agile leaders focus on identifying emerging digital opportunities or competitive
threats. They are engaged, seek to understand the causes and effects of problems at
hand and respond by adapting. At the same time, they are conscious of the need to
provide guidance through a strong vision, as change often threatens to overpower
strategy. Discovery Bank will be entirely technology-led in a market traditionally reliant
on physical bank branches and ATM’s. The bank has been built on the latest technology
and it is bound to disrupt the banking industry in South Africa.33
For agile leaders, informed decision-making essentially entails making decisions
based on evidence obtained from available data. These leaders use the best available
sources of data and apply applicable analytics before making a decision. They rely on
their experience and instinct when they are presented with inadequate or inconsistent
data. Agile leaders place great value on digital technologies to gather and analyse data,
and they are always on the lookout for new data sources to support their informed
decision-making.
‘Today’s volatile and unpredictable business landscape, shaped by digital disruption,
requires managers to adopt an agile leadership approach. Agile leaders exhibit high levels of
humility, adaptability, vision and engagement. They also practice digital business agility
through hyperawareness, informed decisionmaking and fast execution. Combining musthave competencies with these agile behaviours ensures that agile leaders are significantly
well equipped to deal with today’s disruptive business environment.’
Source: Wade, M.R. 2017. Agile leadership in an age of digital disruption. Available
at https://www.imd.org/research-knowledge/articles/agile-leadership-in-an-age-of-digital-disruption.
[Accessed 9 November 2018]. © 2017 IMD – International Institute for Management Development.
Reprinted by permission of the IMD.
Fast execution entails the willingness on the part of a leader to move quickly: often
speed trumps perfection. In an environment characterised by disruption, the
effectiveness of awareness and informed decision-making is significantly reduced if the
leader is not able to act with speed. Agile leaders can only be effective if they are able to
execute an informed decision quickly, and to do so despite organisational, structural or
monetary barriers.
Critical thinking
In an interview exploring the meaning of agility, several South African business leaders
explained what agility means to them. Below are a few excerpts from their responses.
Wendy Luhabe, founder of the Women Private Equity Fund and chair of the African
Leadership University said, ‘Agility means being able to anticipate and being able to respond
as opposed to reacting.’ ... ‘All organisations have to innovate constantly and remain
relevant and useful. In my world – which focuses on the economic empowerment of women
– we have to continuously identify innovative ways women could participate.’... ‘Agility
teaches us to be present’ ... ‘It requires that we decode what is needed and have the
courage to provide a solution on the spot.’
Malusi Ndlovu, General Manager at Old Mutual Corporate Consultants, said, ‘Agility is
important when speed is of the essence. It’s about achieving results in the quickest or most
efficient way possible. There are two parts to it. First, there should be close engagement with
the customer or end user, so that they are consulted from the beginning and right through
the process, not just at the end. Secondly, people should be empowered so that decisions
will actually be made.’ He added, ‘People and organisations across the board will have to
become much more ‘change fit’’. ... ‘Being agile means being able to deal with the changes
that come at you while knowing that you don’t always have to do or change something.’
Group Chief Executive Officer of Dimension Data, Jason Goodall, said agility has two
pillars. ‘The first is speed -- the ability to make swift decisions and to add resources and
allocate funds faster. The second is the ability to change direction, to continually come up
with new ideas and execute them quickly. Achieving both involve relooking at your decisionmaking criteria and having flat rather than hierarchical organisational structures, eliminating
bottlenecks, and building empowered, often virtual, teams who understand and follow a
process and methodology that encourages this kind of thinking.’
Source: van Dijk, M. 2018. Old Mutual Corporate. Inside the agile business. Mindspace, Issue 2. Cape
Town: John Brown South Africa, pp.18-21. Reprinted by permission of John Brown Media and Old Mutual
Limited.
9.4Motivation
Employees (human resources) influence the organisation’s productivity and
profitability directly. To manage employees effectively, managers should understand
what motivates the behaviour of their employees. This is a crucial aspect of the leading
function.
In the context of this chapter on the leading function of managers, the definition of
motivation is ‘an inner desire to satisfy an unsatisfied need’.34 It is an intrinsic process.
Therefore, managers cannot ‘motivate’ their employees, but they can create a work
environment conducive to employees being motivated to achieve organisational goals.
Thus, from an organisational perspective, motivation is the willingness of an employee
to achieve the organisation’s goals.
The motivation process starts with an unsatisfied need and moves in a certain
sequence.35 For example, an employee has an unsatisfied need for higher status in the
organisation. His or her motive is the desire to advance to a managerial position, which
leads to certain behaviour, such as working overtime or enrolling for a management
course. The consequence of the behaviour might be that he or she receives a promotion
(or does not receive a promotion), which will lead to the satisfaction (or dissatisfaction)
of his or her need. If dissatisfaction occurs, the need remains unsatisfied and the
motivation process will start all over again. Satisfaction is usually short-lived because
people have many needs and, as soon as one need is satisfied, another need will surface.
If the person in the example advances to a first-line management position, he or she
may very soon want a further promotion to a middle-management position. This will
again cause dissatisfaction and the motivation process will start over.
If managers understand what motivates the behaviour of their employees, they can
influence employees’ work performance. Yet it is important to note that motivation is
not the only factor that influences work performance. The variables that determine
performance are motivation, ability (training, knowledge and skills) and the
opportunity to perform (resources): 36
Performance = Ability × Motivation × Resources
Effective managers understand that employees must possess a high level of motivation
plus the appropriate training, knowledge and skills to perform effectively in each work
situation. If employees lack the skills they need to perform, they will not be able to do
their work properly, no matter how motivated they are. Organisations should provide
employees with the opportunity to perform, which means that they must have adequate
resources (such as tools, equipment, materials and supplies) to be able to do the work.
The above discussion emphasises the major role managers play in terms of the work
performance of their employees.
The value of theories on leadership and motivation is that they provide managers
with a better understanding of how to manage their employees to make them perform
best. At the same time, these theories ensure that the organisation creates an
environment where employees can satisfy their needs.
In modern organisations, managers also manage groups and teams. In our
discussion thus far, we have concentrated on how managers lead individuals and create
an environment that motivates them to attain organisational goals. However, employees
belong to groups that do much of the work in organisations, working in task groups and
command groups. They also belong to informal groups.
Managers perform the leading function to manage groups such as the functional
departments in an organisation to enable them to achieve the organisation’s goals and
objectives. In addition, managers of contemporary organisations need to create a special
type of group, namely working teams, to perform a variety of tasks.
In view of the presence and importance of groups and teams in organisations,
managers should understand the dynamics of groups and teams and know what team
leadership entails. We investigate these aspects in the following section.
What motivates millennials
The millennial worker was born between the early 1980s and the early 2000s (different
researchers cite different birth years). Millennials comprise a substantial percentage of the
current workforce worldwide. They are active Snapchat users and are as concerned with
posting to Instagram as they are with work-life balance. Characteristics of millennials in the
workplace include self-confidence, digital savviness, the need for affirmation and the
enjoyment of immediate gratification. These workers are also highly motivated to be
successful, and they are very ambitious. Researchers conducting a study on what motivates
millennials concluded that the following factors are relevant:
•Growth potential. Experience trumps all else. Many millennials want to become
entrepreneurs, and they need to start somewhere.
•Recognition is key—happiness equals additions to their LinkedIn resumes and being
given recognition in front of peers for a job well done.
•Flexibility was also at the top of their priority list because having autonomy and control
over their own time at work is very important to millennials.
•Ability to make an impact. They want their work to matter.
•Remuneration – the last factor the millennials listed. They want to feel that they
contribute to the larger picture and make enough money.
Source: Adapted from Scott, J. 2017. Motivating millennials in the workplace so they don’t quit. Available
at https://www.xactlycorp.com/blog/motivating-millennials-it-takes-more-than-money/ [Accessed
18
November 2018]. Reprinted by permission of Xactly Corp.
9.5Groups and teams in organisations
The employees of modern organisations do not work merely as individuals with
individual needs and goals, but also as members of groups and teams. To achieve the
organisation’s goals, managers lead groups and teams, as well as individual employees.
The complexity of global organisations necessitates teamwork and team leadership.
This is also true for top-level management. Mr Adrian Gore acknowledges that the
success of Discovery is not only his achievement, but the effort of an incredible team,
who built the company over the years.
Many writers use the words ‘group’ and ‘team’ interchangeably, but recent
management literature makes a definite distinction between them, saying that while all
teams are also groups, not all groups are teams. A team is a special kind of group, and
changing groups into teams is a process that requires special management skills. This
section first focuses on groups in general and then discusses work teams as an integral
part of successful contemporary organisations.
9.5.1Groups
A group comprises two or more individuals who regularly interact with one another
and who work for a common purpose. People join groups for a variety of reasons,
ranging from satisfying their social needs to achieving goals that are impossible for
them to achieve as individuals. Some people join groups to achieve some level of
prestige or status. Others feel that they enhance their self-worth by belonging to a
specific group. Individual group members often feel they have more power by joining a
group because group action can achieve more than individual action.
In organisations, there are two types of groups, namely informal and formal groups.37
9.5.1.1Informal groups
Informal groups can be interest groups or friendship groups:
•In interest groups, the group members usually share a common interest. For
example, a group of employees might campaign for better cafeteria facilities at their
workplace. When the organisation provides better facilities, the group will disband.
•Friendship groups usually exist to satisfy the social needs of their members. For
example, a group of employees might play bridge once a week.
9.5.1.2Formal groups
Formal groups are categorised as command groups or task groups:
•Command groups appear on the organisational chart, which indicates their line of
authority, for example, from managers to their employees. The organisation’s
structure defines formal groups in terms of allocated work assignments that
determine tasks, and the formation of work groups.
•Organisations create task groups to complete a specific task or project in the
organisation. After completion of the task, the group disbands. Organisations can
create task groups across hierarchical boundaries. For example, the dean of a
university’s College of Management Sciences might appoint a committee comprising
staff members from the production department and the editorial department as well
as junior and senior academics to investigate the quality of the study material
produced for all departments in the college. On completion of the project, the group
will disband.
9.5.2The characteristics of groups
Every group in an organisation is different in terms of its structure or set of
characteristics that shapes the behaviour of both the group and the individual group
members,38 for example, the size of the group, the composition of the group, group
norms and group cohesiveness:
•Group size affects the group’s overall performance. If the group is too big, social
loafing occurs – the tendency of individuals to put in less effort when working in a
group than when working individually. Thus, group size has an influence on the
productivity of groups.
•Group composition can influence a group’s performance. Heterogeneous groups
(with members who are diverse in terms of, for example, gender, race and
nationality) have more difficulty working together at first, but they outperform
homogeneous groups over time.
•Group norms are standards shared by members of a group that develop from
interaction between these members. Norms can be positive or negative, and
managers should manage them. An example of a positive norm is that the group
strives to outperform other groups; a negative norm is: ‘We only do what is asked of
us – no more, no less’.
•Group cohesiveness is the way in which a group stands together as a unit rather
than as individuals. There is a strong relationship between performance norms and
cohesiveness, which can be either beneficial (work according to positive norms) or
detrimental (work according to negative norms) to the organisation. If a group is
very cohesive, the members’ adherence to group norms will be stronger.
•Status in groups can be formal or informal, meaning that groups sometimes give
higher (informal) status to group members who are relatively low on the
hierarchical level of the organisation. Such status derives from factors such as the
age or experience of a group member, or the social influence of a group member.
•The formal leader in a group usually has a title such as section or department
manager, supervisor, project leader or committee chair. However, sometimes an
informal leader has more influence in a group, which may influence the performance
of the group positively or negatively.
To manage groups in an organisation effectively, managers should understand the
structure of groups and how the various characteristics of specific groups influence the
organisation’s performance.
Managers should not underestimate the role of groups in the overall
accomplishment of organisational goals. They should understand group dynamics to
manage the groups in their organisations effectively.
9.5.3Teams
As stated earlier, not all groups are teams. A work group is a unit of two or more people
who interact primarily to share information and make decisions that will help each
group member perform within his or her own area of responsibility.39 Individual
members of work groups are accountable and rewarded for their own performance.
However, a work team ‘comprises a small number of employees with complementary
competencies who work together on a project, are committed to a common purpose and
are accountable for performing tasks that contribute to achieving an organisation’s
goals’.40 Work teams perform collectively, and members are dependent on each other to
complete their work, while workgroup members only share information. An example of
a work group is a pool of administrative clerks. One clerk’s performance appraisal and
rewards are not dependent on the performance of the other clerks. Furthermore, the
group’s performance is the sum of the group members’ individual performances.
An example of a work team is a team tasked with developing a new product from
conception to completion. All the members are dependent on each other because the
output of one member becomes the input of another member.
While work groups have neutral and sometimes negative synergy, work teams
have positive synergy, meaning that the performance of an effective team can be greater
than the sum of the performance of individual team members. For example, the efforts
of the team tasked with developing a new product can amount to more than the sum of
their individual performances because they are creating something new.
Whilst group members are only accountable for their own performance, team
members are individually and mutually accountable for the performance of the team. In
the above example of the product-development team, the team members are mutually
responsible and accountable for the new product but are also individually accountable
for their own inputs.
Lastly, while the skills of the members of work groups are random and varied,
the skills of members of work teams are complementary because of the interdependent
nature of their work.41
Work teams have many advantages, but it is wrong to perceive them as a cure-all
solution to organisational problems. Teams are not suitable in all organisational
settings. Teams are effective only in organisations in which the organisational culture is
conducive to teamwork. Furthermore, the organisation’s reward system must reward
team performance. Top managers’ commitment and support for teams must be evident
throughout the organisation, and the work at the organisation should be suitable to
perform in a team environment.
Yet, despite these considerations, teams are gaining popularity throughout the
world and complex global organisations cannot function without effective teams. The
following are the different types of teams:42
•Problem-solving teams comprise employees from the same department who
meet regularly to discuss ways of improving quality, efficiency and the work
environment.
•Self-managed work teams take on the responsibilities from their former
managers, including tasks such as planning, scheduling and control. Team members
address problems in the work process – sometimes, even, the selection of team
members and discipline.
•Cross-functional teams comprise employees at the same hierarchical level, but
from different work areas, who come together to accomplish a task. These teams are
effective in allowing people from diverse areas in an organisation to exchange
information, develop new ideas, solve problems and co-ordinate complex projects.
Task forces and committees are common examples of cross-functional teams.
High-performance teams have several characteristics in common:
•A clear understanding of the team’s goals, and the technical skills and abilities
needed to achieve these goals.
•Members who can adjust their skills.
•High mutual trust among members and unified commitment.
•Good communication and adequate negotiating skills.
•Team leaders who encourage team members by clarifying goals, and who help
members to realise their potential.43
Key problem areas identified in South African teams
The main focus of a study conducted to investigate the performance of work teams in
corporate South Africa was to identify key problem areas occurring in teams. The sample
included 150 South African organisations, of which more than 50 per cent responded. A
common set of problems affecting the majority of work teams emerged. The themes or
factors explained why teams are not effective, or fail to achieve their objectives. The table
below list these contributing factors, ranked from the most important (1) to the least
important (10) reason.
1.Lack of trust
2.Weak task leadership
3.Poor implementation/‘no follow through’
4.No focus
5.Poor interpersonal skills
6.Lessons and mistakes not acknowledged
7.Poor interpersonal chemistry
8.False commitments from team members
9.Working in silos
10.Lack of management support
The results indicate that trust, leadership and follow through are key reasons why teams are
not effective. These results emphasise the importance of trust-building processes in leader-
follower relationships. The influence of a trusting relationship impacts on the performance of
teams, conflict, change, communication and diversity management.
Source: Steinmann, N. & Martins, N. 2002. South African teams. In Peoples Dynamic. Available
at http://www.peoplesdynamic.co.za/articles.html. [Accessed 18 November 2018]. Reprinted by permission
of Niel Steinmann of People’s Dynamic Development.
One more aspect of using teams in organisations is team leadership. According to
Belbin,44 the effective team leader limits his or her role and is inclined to delegate and
not interfere with the way in which team members do their work. However, team
leaders concentrate on outcomes. Team leaders build on diversity and seek talent – the
team leader welcomes people with special abilities to improve the balance of the team.
Team leaders develop team members by building on their strengths. Effective team
leaders fulfil a leadership role by projecting the vision and formulating a mission,
thereby creating a ‘map’ according to which each team member can contribute in his or
her individual manner to the attainment of team objectives.
Managers communicate their organisations’ visions, missions, goals, strategies,
plans, problems and expectations to employees. They also listen to employees’
problems and aspirations. The ability to communicate effectively is an important
element of leading. The following section describes a simple communication model. The
discussion of communication appears here as another element of the leading function
because effective communication is an essential part of effective leadership.
9.6Communication
Communication is an essential element of leading. Effective leadership depends on
constant communication between leaders and their employees. It is important in
building and sustaining relationships in an organisation.
Good communication is conducive to good relations between managers and
individual employees, groups, teams and, ultimately, the organisation and its
environment. Managers devote a considerable proportion of their time to
communicating with the organisation’s stakeholders, both inside and outside the
organisation. Furthermore, the management process is dependent on effective
communication.
Theoretically, communication is the transfer of information or messages from one
person to another. Figure 9.4 illustrates a simple communication model, which provides
a basis for understanding the key elements of interpersonal communication.
The sender is the source of a message. To communicate effectively, the sender
should know exactly what the message is that he or she wishes to transmit. The sender
should take care with his or her choice of words and their meaning and should
encourage two-way communication by showing insight into the receiver’s perceptions.
The message may convey ideas, opinions, plans, orders or explanations. In the
interests of effective communication, the message should be simple and clear.
The communications channel is the way the message reaches the receiver. It may
assume any form that the recipient’s senses can perceive it, if it is comprehensible. For
example, the recipient can hear spoken language, see, or feel gestures and read the
written word.
The receiver of the message should absorb the message and show that he or she has
received and understood the message (listening skills are important here).
For communication to be effective, the recipient should receive the message
unimpeded, meaning that the recipient should understand the message in accordance
with the sender’s intentions.
Because effective communication is so important in leadership, managers should
remove all hindrances that may affect the clarity of their messages, such as obscurity,
language differences, erroneous perceptions, doubts about the source or sender and
ambiguities. Managers should promote effective communication by encouraging
feedback and by using face-to-face communication wherever possible. Managers can
enhance their communication by using simple language. They should contemplate any
symbolic content in their communication before sending the message.
Figure 9.4: A basic communication model
Listening
Listening is a crucial component of effective communication. A good listener:
•stops what he or she is doing and gives his or her complete attention to the speaker;
•avoids distractions such as fiddling with pens;
•stays ‘tuned in’ (not letting his or her mind wander);
•does not assume that he or she knows what the speaker is going to say and does not
jump to conclusions;
•listens to the entire message without interrupting the speaker;
•asks questions if he or she feels he or she has incomplete information;
•takes notes to help him or her remember the message and to document it, if necessary;
•conveys meaning – for example, uses verbal clues to let the speaker know that he or
she is listening (such as nodding, making eye contact or saying, ‘I see’ or ‘I understand’);
and
•look for non-verbal cues such as body language and eye expression (sometimes people
say one thing and mean something else, which may appear as a non-verbal cue).
9.7Summary
To be successful, organisations need managers who are also good leaders. Managers
perform the leading function to manage the human resources in their organisations
effectively. They use authority and power to influence their employees to strive
willingly to achieve organisational goals. Leadership theories help managers to
understand what leadership entails. In this chapter, we examined the most important
categories of leadership models as well as contemporary issues in leadership. Effective
managers should understand how their employees’ behaviour is motivated. Modern
organisations use work groups and work teams extensively, and managing them is an
added responsibility of contemporary managers. Communication is a crucial element of
the leading function, without which a manager will not be a good leader.
Small business perspective: Leading in the small
business organisation
The leading function of managers in big organisations with several levels of management
and a definite chain of command differs from the leading function of owners or managers in
small business organisations, which can function successfully with only one level of
management where the owner or manager communicates directly with employees.45 In small
businesses the personal involvement of the entrepreneur with employees can influence the
success of the business, because ‘if the employer-employee relationship is good, employees
in small businesses develop strong feelings of personal loyalty to their employer’.46 The
strength of a small business may very well depend on the relationship of the owner–
manager with employees and his or her willingness to create a work environment in which
employees are motivated to attain the objectives of the business. The delegation style of a
manager, whether he or she is employed by a large organisation or is the owner–manager of
a small business, is a crucial element of the leading function. Effective leaders delegate to
employees the authority to use organisational resources and the responsibility to perform
their delegated tasks, while they, themselves, remain accountable for the completion of the
tasks. Failure to delegate may be the reason many businesses never grow beyond a small
business where the owner can directly supervise everything in detail.47
KEY TERMS
accountability
management versus leadership
agile leadership
managerial grid
authority
path-goal model
autocratic leadership style
personal power
behavioural leadership theories
peer to peer leadership
charismatic leadership
position power
coercive power
power
concern for people
production-oriented leadership sty
concern for production
referent power
democratic leadership style
responsibility
emotional intelligence
reward power
employee-oriented leadership style
servant leader
expert power
synergy
Fiedler’s contingency theory of leadership
team leadership
formal group
trait theory
Fourth Industrial Revolution
transactional leadership
Hersey and Blanchard’s situational leadership model
transformational leadership
informal group
trust
laissez-faire leadership style
visionary leadership
leadership
work maturity
legitimate power
Questions for discussion
1.How would you define the leading function of managers?
2.How does Mr Gore, the Chief Executive Officer of Discovery see his leadership
role?
3.Are managers also leaders?
4.Explain the differences between managers and leaders.
5.Mr Gore, the Chief Executive Officer of Discovery, is an agile leader. Discuss.
6.What are the components of leadership?
7.Why are managers who use power effectively strong leaders?
8.What are the shortcomings of trait theory and the behavioural theories?
Multiple-choice questions
1.Which statement is false?
a.Leadership is about bridging the gap between formulating plans and achieving
goals.
b.The behavioural approach to leadership focuses on how leaders should
behave in a specific situation.
c.According to Fiedler’s theory of leadership, how well a leader’s style fits the
situation determines his or her effectiveness.
d.House developed the path-goal theory.
2.Group __________ can influence the group’s adherence to group norms positively.
a.size
b.composition
c.leadership
d.cohesiveness
3.Which one of the following is not a characteristic of a high-performance team?
a.High mutual trust among members
b.Adequate negotiating skills
c.Working in silos
d.Members who can adjust their skills.
4.A ________ is tasked with developing a new product from conception to completion.
a.formal group
b.work team
c.work group
d.team leader
5._________ leadership is the ability of a leader to be able to lead in a wide range of
circumstances.
a.Servant
b.Agile
c.Peer to peer
d.Ethical
References
1.Smit, P.J., Botha, T. & Vrba, M.J. 2016. Management principles: A contemporary edition
for Africa. Cape Town: Juta and Company (Pty) Ltd, p. 313.
2.Ibid.
3.Lussier, R.N. & Achua, C.F. 2001. Leadership: Theory, Application, Skill Development.
Cincinnati: South-Western, p. 7.
4.Discovery Leadership Summit 2018. Available
at https://www.discoveryleadershipsummit-2018.co.za. [Accessed 17 November
2018].
5.Gore, A. 2018. My plea for imagining a better, fairer nation is based on hard, cold
science. In Business Day, Friday 2 November, p. 9.
6.Pittman, J. 2014. Adrian Gore: The disruptor. In Entrepreneur Magazine. Available
at https://www.entrepreneurmag.co.za/advice/success-stories/entrepreneurprofiles/adrian-gore-the-disrupter/. [Accessed 17 November 2018].
7.Mashego, P. & Thukwana, N. 2018. Discovery promises brave new bank world.
In Business Times, Sunday Times, 18 November, p. 7.
8.Ibid.
9.Shevel, A. A worrier with a positive outlook. In Sunday Times Top 100 Companies,
Supplement to Sunday Times, 11 November, p. 13.
10.This section is based on Lussier, R.N. 2000. Management fundamentals. Cincinnati:
South-Western, pp. 453–457 and Robbins, S.P. 2003. Organizational behavior. Tenth
edition. Upper Saddle River, New Jersey: Prentice-Hall, pp. 316–328.
11.Ken Blanchard Trust: An essential ingredient for leadership success. Available
at http://www.kenblanchard.ro/pdfs/trust-an-essential-ingredient-for-leadershipsucces.pdf [Accessed 18 November 2018].
12.Robbins, S.P. 2003. Organizational behavior. Tenth edition. Upper Saddle River, New
Jersey: Prentice-Hall, p. 336.
13.Ibid., p. 340.
14.Shevel, A. A worrier with a positive outlook. In Sunday Times Top 100 Companies,
Supplement to Sunday Times, 11 November, p. 13.
15.Based on Smit, P.J., Botha, T. & Vrba, M.J. 2016. Management principles: A
contemporary edition for Africa. Cape Town: Juta and Company (Pty) Ltd, pp. 332-333.
16.Burns, J.M. 1978. Leadership in organisations. New York: Harper & Row, p. 20.
17.Bass, B.M. 1985. Leadership and performance beyond expectations. In Yukl, G.
1998. Leadership in organisations. New York: Prentice-Hall.
18.Vrba, M. 2007. Emotional intelligence and leadership behaviour in a sample of
South African first-line managers. Management Dynamics, 16(2): 25–35.
19.Barling, J., Slater, F. & Kelloway, E.K. 2000. Transformational leadership and
emotional intelligence. Leadership and Organizational Development Journal, 21(3):
157–161.
20.Lowe, K.B. & Kroeck, K.G. 1996. Effectiveness correlates of transformational and
transactional leadership: A meta-analytic review. Leadership Quarterly, 7(3): 385–426.
21.The role of transformation leaders in the fourth industrial revolution.
2018. Business Essentials. Available
at http://www.businessessentials.co.za/2018/05/03/the-role-of-trans-formationleaders-in-the-fourth-industrial-revolution. [Accessed 17 November 2018].
22.Vrba, M.J. 2007. Emotional intelligence and leadership behaviour in a sample of
South African first-line managers. Management Dynamics, 16(2): 25–35. In Smit, P.J.,
Botha, T. & Vrba, M.J. 2016. Management principles: A contemporary edition for Africa.
Cape Town: Juta and Company (Pty) Ltd, pp. 334-335.
23.Salovey, P. & Mayer, J.D. Emotional Intelligence. Imagination, Cognition and
Personality, 9(3), p. 189.
24.Goleman, D. 2001. An EI-based theory of performance. In Cherniss, C. & Goleman, D.
(Eds). The emotionally intelligent workplace. San Francisco: Jossey-Bass, p. 27.
25.Ibid., pp. 38-39.
26.Schwab, K. 2018. Four leadership principles for the Fourth Industrial
Revolution. European Business Review, 3/2018. Available
at http://www.europeanbusinessreview.eu/page.asp?pid=1615.
27.Adapted from Ancona, D., Kochen, T.A., Scully, M., Van Maanen, J. & Lewisney, D.E.
2005. Managing for the future: Organizational behavior & processes. Third edition.
Cincinnati: South-Western College, pp M14–8-16.
28.Robert K Greenleaf Centre for Leadership. What is servant leadership? Available
at https://greenleaf.org/what-is-servant-leadership/. [Accessed 20 July 2015].
29.Smit, P.J., Botha, T. & Vrba, M.J. 2016. Management principles: A contemporary
edition for Africa. Cape Town: Juta and Company (Pty) Ltd, pp. 336-337.
30.Based on a discussion in Baker, M.N. 2014. Peer to peer leadership: Why the
network is the leader. San Francisco, CA: Berret-Koehlef, pp. 8-53. In Smit, P.J., Botha, T.
& Vrba, M.J. 2016. Management principles: A contemporary edition for Africa. Cape
Town: Juta and Company (Pty) Ltd, pp. 336-337.
31.Wikipedia. Available at https://en.wikipedia.org/wiki/Agile_leadership. [Accessed
18 November 2018].
32.Wade, M.R. 2017. Agile leadership in an age of digital disruption. IMD. Available
at https://www.imd.org/research-knowledge/articles/agile-leadership-in-an-age-ofdigital-disruption. [Accessed 9 November 2018].
33.Mashego, P., & Thukwana, N. 2018. Discovery promises brave new bank world.
In Business Times, Sunday Times, 18 November, p. 7.
34.Lussier, R.N. 2000. Management fundamentals. Cincinnati: South-Western, p. 420.
35.Ibid.
36.Robbins, S.P. 2003. Organizational behavior. Tenth edition. Upper Saddle River, New
Jersey: Prentice-Hall, p. 175. In Smit, P.J., Botha, T. & Vrba, M.J. 2016. Management
principles: A contemporary edition for Africa. Cape Town: Juta and Company (Pty) Ltd,
pp. 399-401.
37.Robbins, S.P. 2003. Organizational behavior. Tenth edition. Upper Saddle River, New
Jersey: Prentice-Hall, p. 220.
38.Based on Robbins, S.P. 2003. Organizational behavior. Tenth edition. Upper Saddle
River, New Jersey: Prentice-Hall, pp. 226–238.
39.Robbins, S.P. 2003. Organizational behavior. Tenth edition. Upper Saddle River, New
Jersey: Prentice-Hall, p. 258.
40.Ibid.
41.Ibid.
42.Ibid., pp. 259-262.
43.Robbins, S.P. & Decenzo, D.A. 2001. Fundamentals of management. Third edition.
Upper Saddle River, New Jersey: Prentice-Hall, p. 290.
44.Belbin, R.M. 2010. Team roles at work. Second edition. Oxford: Elsevier Ltd, pp. 122–
123.
45.Nieman, G. (Ed). 2006. Small business management: A South African approach.
Pretoria: Van Schaik, p. 21.
46.Longenecker, J.C., Moore, C.W. & Perry, J.W. 2003. Small business management: An
entrepreneurial emphasis. Twelfth edition. Cincinnati: South-Western Cengage, p. 454.
47.Ibid., p. 214.
CHAPTER 10
Controlling the management
process
Tersia Botha
The purpose of this chapter
Control is the last of the four fundamental functions of management. It is the final step in the
management process, where the assessment of actual performance against planned
performance initiates a new cycle of planning, organising, leading and control. This chapter
deals with the purpose of control and examines how the control process works. It also
examines the areas of control that management should focus on, such as the control of
physical resources, quality control, financial control, budgetary control, the control of
information and the control of human resources. The characteristics of an effective control
system are also briefly examined.
Learning outcomes
On completion of this chapter you should be able to:
•give an overview of the purpose of control
•describe how a control process should function
•explain the various types of control
•discuss the characteristics of an effective control system.
10.1Introduction
Organisations use control procedures to ensure that they are progressing towards their
goals, and that their resources are being used properly and productively. This chapter
examines the final component of the management process: controlling. Although it is
the final step in the management process, it forms the basis for a new cycle of
management activities because it gives feedback about, and influences the first step in
the management process (planning). Without any knowledge of how successfully the
plans were implemented or how effectively the goals were achieved, managers would
not be able to start the next management cycle of planning, organising, leading and,
ultimately, controlling.
Brilliant plans may be formulated, impressive organisational structures may be
created, and good leadership may be applied, but none of this ensures that the activities
will proceed according to plan or that the goals and carefully laid plans will, in fact, be
realised. An effective manager is therefore someone who follows up on planned
activities, seeing to it that the things that need to be done are carried out and that the
predetermined goals are reached. The control process can be defined as the process of
establishing and implementing mechanisms to ensure that the objectives of the
organisation are achieved. Managers at all levels and in all departments should be
involved in the process of control. Until the activities of individuals, departments or
units are evaluated (in other words, until actual performance is compared with the
standard required), management will not know whether activities have been executed
according to plan and will be unable to identify weaknesses in their plans. Controlling
means narrowing the gap between what was planned and the actual achievement of
management, and ensuring that all activities are carried out as they should be. The
management process takes place between planning and control. Successful
management is often dependent on sound planning and effective control.
The case study that follows provides an illustration of the importance of effective
control mechanisms in an organisation, and the alignment that should exist between
planning and control activities in an organisation.
CASE STUDY: NEDBANK
Nedbank’s history can be traced back to the early 19th century with the establishment of the
Cape of Good Hope Bank in 1831. Following successive branding and structural changes,
from The Nederlandsche Bank voor Zuid-Africa to the Netherlands Bank of South Africa, to
the Nedcor Group in the 1980s, the Nedbank Group was formed in 2003. Nedbank regards
2004 as a watershed year for the group as both structural and strategic changes were
implemented to restore its performance and lay the foundation for sustainable growth into
the future. In this year, Nedbank was faced with considerable challenges and a highly
uncertain future. In the previous year, the Nedcor Group was formed, combining Nedcor,
BoE, Nedcor Investment Bank and Cape of Good Hope Bank. In 2004, the bank was losing
market share, headline earnings were down 98 per cent with a return on equity of only 0,4
per cent. Nedbank was considered the lowest of the top banks in South Africa, who were all
on an upwards trajectory compared to Nedbank’s decline. Nedbank’s reputation was at an
all-time low. During this time, Tom Boardman was appointed as CEO and was tasked with
taking control of and rebuilding Nedbank. On the day of the announcement of his
appointment, the bank’s stock prices dropped by 6 per cent. However, the new CEO had a
plan which entailed a complete overhaul of the way the company did business. Boardman
formulated the following goals: regain market share in key retail product areas and penetrate
the mass market; retain leading positions in key wholesale market segments and grow the
business banking franchise; reposition and stretch the Nedbank brand for broader market
appeal; become a bank for all South Africans; and become the best place to work for in the
financial services sector.
The core business strategy of the bank informed a redefinition of its brand and the
supporting marketing initiatives, anchored in the restated vision ‘[t]o become Southern
Africa’s most highly rated and respected bank … by our staff, clients, shareholders,
regulators and communities’. However, in order to be successful, Tom Boardman and
Nedbank understood that, in order to realise the vision, the bank needed to change and
undergo a learning process. In addition, they also realised that this new vision needed to be
supported by a strong strategy and a uniting set of values. Workshops were launched to
implement strategies at lower levels of management. Control measures were then taken to
ensure that Nedbank attained its ‘Journey Back to the Top’.
The outcomes of the control measures taken by Nedbank, and the implementation of its
turnaround strategy were remarkable. Since 2005, staff at Nedbank have worked together in
a co-operative fashion. A measure of this is a decrease in the entropy score, which has
fallen from 25 per cent in 2005 to 13 per cent in 2009 (entropy is a universal property of
systems and refers to their tendency to run down and die). The bank realised their targets of
20 per cent return on equity and 55 per cent cost-to-income ratio. They also had the highest
shareholder return of all the ‘Big Five’ South African banks in 2009. However, Nedbank
continues to face challenges. Market conditions within the financial industry are still marked
by instability and ongoing uncertainty. In 2010, Nedbank had a change in leadership with the
appointment of Michael W T Brown as the new CEO, following the retirement of Tom
Boardman. Under its new leadership, Nedbank is still anchored in the vision, values,
objectives and strategies as formulated by Tom Boardman and his management team,
which are strongly supported by all employees of the bank. Despite the environmental
challenges, Nedbank continues to thrive on the strong control measures that were taken
during a time when the bank most needed it.
Sources: Adapted
from
Nedbank
Group.
Our
history.
2018.
Available
at https://www.nedbank.co.za/content/nedbank/desktop/gt/en/aboutus/about-nedbank-group/who-weare/Our-history.html [Accessed 20 April 2018]; Barrett Values Centre. 2010. Case Study: Nedbank.
Available
at https://www.valuescentre.com/sites/default/files/uploads/2011-0729/Barrett%20Nedbank%20Case%20Study%20final.pdf [Accessed 20 April 2018].
10.2The purpose of control
An organisation needs a control process because even the best-laid plans may go wrong.
In the case of Nedbank, a new vision, plans and strategies were formulated during its
watershed year when the Group performed financially very poorly. During this time,
Nedbank faced an uncertain future, and its reputation was at an all-time low. Tom
Boardman, as CEO of the bank, took control and started to rebuild Nedbank.
A control process is necessary for the following reasons:
•Control is linked with planning, organising and leading. Planning is the first step in
control. Without control, planning is pointless.
•Control helps companies adapt to environmental change (the business
environment was discussed in detail in Chapter 4). It enables management to cope
with change and uncertainty. If an organisation is to reach its goals according to
plan, control is necessary. The variables in the turbulent contemporary business
environment mean that an organisation is seldom able to realise its goals strictly
according to plan. Raw materials may not be delivered on time, labour unrest or
defective machinery may delay the organisation’s operations, unexpectedly high
interest rates may affect the cost structure, and so on. Without control, the impact of
environmental change on the organisation is difficult to detect.
•Control helps to limit the accumulation of error. Managers and employees are
capable of making poor decisions and committing errors. An effective control system
should detect such errors before they accumulate and become critical.
•Control helps companies to cope with increasing organisational size and
complexity. As a business grows, more people are employed, new products are
developed, new equipment is bought, new industries are entered, and branch offices
are opened as the activities of the business expand into different geographical
regions. Over time, the business becomes an extensive network of activities that
include production, finance, administration, staff and marketing. Without an
effective system of control, it would be extremely difficult to spot weak points in a
highly complex network and rectify them in good time.
•Control helps to minimise costs. When implemented effectively, control can help to
reduce costs and increase output. For example, by controlling the raw materials
used in an organisation, potential problems can be anticipated and prevented, thus
reducing production costs and improving outputs.
An overview of the control process will clarify the importance of control.
10.3The control process
As mentioned in the introduction, control is the process by which management ensures
that the organisation’s goals are accomplished or that actual performance compares
favourably with predetermined standards. This process comprises four steps (see
Figure 10.1).
The control process includes setting standards against which actual performance
can be measured, measuring actual performance, evaluating any deviations that might
occur and taking steps to rectify deviations. Each of these steps is discussed below.
Figure 10.1: The control process
10.3.1Step 1: Establish standards
The first step in control is to establish performance standards at strategic points.
Because of the close relationship between planning and control, it may be said that
control begins at the planning stage. It is often difficult to distinguish between these two
functions of management because, in a sense, control means revised planning and the
revised allocation of resources. The control system should therefore be a mirror image
of planning, as the plans indicate the goals and setting of standards or norms necessary
for control.
A performance or control standard is a planned target against which the actual
performance will be compared. A building project that has to be completed by a certain
date will have control standards at strategic stages, such as completion of foundations
by 31 March, completion of concrete structure by 30 June, completion of roof by 15 June
and so on.
To make the control process possible and worthwhile, the performance standard
should be relevant, realistic, attainable and measurable, so that there can be no doubt as
to whether the actual performance meets the standard. Although it is difficult to make
generalisations about suitable performance standards for different businesses, it should
be possible in any particular business to convert strategy into comprehensive plans and
goals. From these, appropriate performance standards can be developed, for example:
•Profit standards indicate how much profit the business expects to make over a
given period.
•Market-share standards indicate what share of the total market the business is
aiming to conquer.
•Productivity standards are indicated by expressing inputs and outputs in relation
to each other as ratios. Such ratios indicate the relative productivity with which
tasks are performed.
•Staff-development standards indicate the effectiveness of training programmes for
staff.
•Standards are a function of the goals that are set in the planning phase.
Performance standards, of which the above examples are only a few, enable
management to distinguish between acceptable and unacceptable performance.
They also enable management to monitor strategies and goals. To be effective, these
standards should be the responsibility of a particular individual at some strategic
point.
•In the case of Nedbank, Tom Boardman formulated various new standards in terms
of market share, the bank’s position in key wholesale market segments, and the bank
as an employer in the financial services sector.
10.3.2Step 2: Measure actual performance
The collection of information and reporting on actual performance are continuous
activities. As in the case with performance standards, it is also important for the
activities to be quantifiable before any valid comparisons can be made. Another
important requirement regarding the measurement of actual achievement is that the
reports should be absolutely reliable. Unless they are totally accurate, control will not
be effective. Moreover, observation and measurement must be carried out at the
necessary strategic points and according to the standards determined by the control
system.
Important considerations in the measurement and reporting of activities are which
information and how much information should be fed back, and to whom. In a small
business or at the lower-management levels of a fairly large business, operational
management is more or less fully informed, and this is not of vital importance. But as a
business increases in size and information about activities has to be transmitted to
higher levels, the question of control becomes more important. It is at that point that the
principle of control by exception is applied. This means that only important or
exceptional disparities between real and planned achievement are reported to top
management. Less important deviations are dealt with by employees.
Management information is presented to indicate the disparities between
performance standards and actual performance, and to enable management to
concentrate on deviations or problem areas. For example, management might be highly
satisfied with a report indicating that sales are 10 per cent higher than in the previous
year, but they are likely to feel less complacent about the fact that sales of the
company’s market leader have shown a drop of 10 per cent. The lapse of time between
performance and measurement must be kept to the minimum so that deviations may be
spotted as early as possible.
In the Nedbank case study, actual performance was measured in terms of the bank’s
financial performance (for example, return on equity and cost-to-income ratio) as well
as measures of staff working together in a co-operative way (as measured by the
entropy score).
10.3.3Step 3: Evaluate deviations
This step comprises the determination of the performance gap between the
performance standard and actual performance. It is important to know why a standard
has only been matched and not exceeded, or even why performance has been much
better than the standard. This could, for example, be the result of a new trend in the
business environment, which might then be exploited more effectively. The nature and
scope of the deviations responsible for the so-called performance gap may have
various causes. In some cases, the causes may be fairly obvious. In other cases, the
causes may be so obscure that it becomes difficult to identify them. It is therefore
impossible to make generalisations about the causes of disparities between actual
performance and standards.
Firstly, it is necessary to make sure that the disparities are genuine. In other words,
it must be determined whether both the performance standard and the actual
performance have been set and measured objectively. If the standard is set too high,
further examination of apparent deviations may be a waste of time.
Secondly, it must be determined whether the deviations are large enough to justify
further investigation. Upper and lower limits should be set for each deviation, and only
those deviations that exceed the limits should be subjected to further examination.
Thirdly, all the reasons and activities responsible for the deviation should be
identified.
At this point, decisions about corrective action, the last step in control, must be
taken.
10.3.4Step 4: Take corrective action
The final step in the control process is to determine the need for corrective action and
to ensure that deviations do not recur. If actual achievements match the standards, then,
of course, no corrective action is needed, provided that standards have been set
objectively. If actual achievements do not match the performance standards,
management has a choice of three possible actions:
•Actual performance can be improved to reach the standards.
•Strategies can be revised to accomplish the standards.
•Performance standards can be lowered or raised to make them more realistic in the
light of prevailing conditions.
In the Nedbank case study, the outcomes of Tom Boardman’s implementation of
corrective action were remarkable. The bank’s financial performance, staff morale and
corporate culture improved. This contributed to the sustainability of the bank in an
uncertain environment.
Step 4 completes the cycle of the control process. Corrective action is, in a sense, the
point of departure for the next cycle in the management process. However, the term
‘control’ has different meanings for different people. It often has a negative connotation
for people who feel that their freedom and initiative are being restricted. It is therefore
important to maintain a balance between control measures and control of people. It
should also be remembered that there are limits to the time and money that can be
spent on control. Moreover, control should be continually adapted to changing
circumstances.
The Nedbank case study is an example of the positive outcomes of implementing the
control process. The following case study illustrates the consequences of the absence of
a control process at another South African bank.
CASE STUDY: The collapse of African Bank Investments Limited (Abil)
African Bank Investments Limited (Abil) was co-founded by Leon Kirkinis in 1999. He has
been described as one of the sharpest minds in banking, who changed South Africa by
expanding credit to the poor. From 1999 onwards, Kirkinis built Abil into the country’s largest
granter of loans that were not backed by collateral. Styling himself as a visionary for lending
to South Africans ignored or deemed too risky by conventional banks, Kirkinis fuelled profits
by granting loans at annual interest rates as high as 60 per cent.
Abil did not take deposits, relying instead on stock and bond markets to fund its lending.
It was one of the most desirable stock on the Johannesburg Stock Exchange for most of the
first decade of this century. The company’s share price rose from around R5,25 per share in
2003 to more than R22,50 per share in 2008. It also offered investors a very appealing cash
dividend. At its peak, Abil traded on a dividend yield of over 9,0 per cent. Under the
leadership of its charismatic CEO, Leon Kirkinis, Abil was reimagining what micro lending
could do in South Africa, and seemed to prove that this was not only a viable business
model, but also a very profitable one. Between 2003 and 2008, Abil more than doubled its
annual profits from R660m to R1,56bn. In 2008, Kirkinis unilaterally took the decision to buy
Ellerines (a retail furniture company) for R9,1 billion, without proper due diligence or full
board approval. In a 2012 statement, Kirkinis attributed the company’s success to having
‘built a robust, well capitalised and flexible business to position us as the market leader in a
larger, more competitive unsecured credit market’. In the same year, Kirkinis was ranked the
37th wealthiest person in South Africa in the annual Sunday Times Rich List. Little did
Kirkinis know how the fate of the company would change in the years to come.
Abil became more vulnerable with the deterioration of its target market, caused by
protracted mining strikes which began in 2012. As strikes crippled the South African platinum
industry, miners began to default on loans. In February 2013, Abil was charged with reckless
lending from the credit regulator, and in October 2013 it paid R20m to settle a case after an
investigation found that the bank had advanced at least 700 loans without first carrying out
affordability assessments. In the same year, the central bank said in a statement that it told
Abil to sell Ellerines, which was losing at least R70m per month. Kirkinis had other plans; he
wanted to keep Ellerines and the distribution network that the retailer provided for loans.
Through six years of declining sales, Abil continued to try and make Ellerines viable by
searching for a retail partner, a partner that was never found. Ellerines applied for business
rescue in August 2014.
In August 2014, Abil’s shares were suspended on the JSE. The South African Reserve
Bank (SARB) put the underlying business under curatorship, which few shareholders had
anticipated. Less than a year earlier Abil had raised R5,5bn in a rights issue that was widely
supported, even though it was already apparent that the company had severely
underestimated its bad debts. Within months, these had sunk the business, and
shareholders would have been left with nothing had the SARB not stepped in.
The Myburgh Report, which analysed the reasons for Abil’s collapse, made some very
uncomfortable findings. Financially speaking, not making sufficient provision for bad debts,
and engaging in unsustainable lending had led to the bank’s collapse. The Myburgh Report
also found that Kirkinis had an overwhelming influence over the board and the operations of
the bank. Essentially, no one questioned him. The starkest example is that he had
unilaterally made the decision to buy Ellerines for R9,1bn, without proper due diligence or full
board approval. In hindsight, many asset managers were also far too eager to believe what
Kirkinis was telling them. They continued to believe him until it was too late. In addition,
certain members of the board did not have the appropriate competence or knowledge of
banking. The board was also extremely small for a banking board, with too many executive
directors. This left no real room for challenging independent voices. This is really the crux of
the African Bank lesson – that no analysis of African Bank was truly complete without a
thorough analysis of its corporate governance. This case stands out as one of South Africa’s
most high profile corporate failures – offering us an opportunity to learn from mistakes to
ensure that history does not repeat itself. Since the SARB put Abil under curatorship, various
control measures have been implemented, of which taking deposits and only engaging in
sustainable lending are probably the most important. These measures have saved the bank
and made it possible to continue operating.
Sources: Giamporcaro, S. 2017. Lest we forget – lessons from African Bank. 27 September 2017. Fin24.
Available at https://www.fin24.com/Opinion/lest-we-forget-lessons-from-african-bank-20170927 [Accessed
8 October 2018]; Moguldom. 2014. Why it failed: African Bank gave credit to the poor. Available
at https://moguldom.com/70304/failed-s-african-bank-gave-credit-to-the-poor/ [Accessed 10 October 2018].
10.4Types of control
In the introductory discussion of control, it was stated that organisations use control
procedures to ensure that they are progressing towards organisational goals and that
resources are being used properly and productively. But what exactly should be
controlled to ensure that an organisation is progressing towards its goals?
This section focuses on the different areas and levels of control in an organisation.
10.4.1Areas of control
As a rule, management should identify the key areas to be controlled. These are the
areas responsible for the effectiveness of the entire organisation. For example, the
production department of a manufacturing organisation is a key area, as is the
purchasing department of a chain store. Generally, a small percentage of the activities,
events or individuals in a given process are responsible for a large part of the process.
Thus, 10 per cent of a manufacturing organisation’s products may be responsible for 60
per cent of its sales, or 2 per cent of an organisation’s personnel may be responsible for
80 per cent of its grievances. By concentrating on these strategic points, for example, the
organisation’s main activities are exposed to control. The Nedbank case study showed
that by successfully making strategic and structural changes, Tom Boardman turned
Nedbank around.
Most organisations define areas of control in terms of the four basic types of
resources they use. Generally, human, financial, physical and information resources are
deployed to accomplish specific goals, especially those revolving around profitability.
Control should therefore focus on the effective management of these resources. Figure
10.2 illustrates these four key areas of control:
1.Physical resources, which entails factors such as inventory control and quality
control.
2.Human resources, which involves orderly selection and placement of employees,
control over training and personnel development, performance appraisal and
remuneration levels.
3.Information sources, which relates to accurate market forecasting, adequate
environmental scanning and economic forecasting.
4.Financial resources.
Note that in Figure 10.2, financial resources are situated at the centre of the other three
resources because they are controlled in their own right (for example, cash-flow or
debtor control) and because most control measures or techniques (for example,
budgets, sales, production costs, market share and various other magnitudes) are
quantified in financial terms.
Figure 10.2: Key areas of control
The four focal points of control are discussed in greater detail below.
10.4.1.1The control of physical resources
An organisation’s physical resources are its tangible assets, such as buildings, office
equipment and furniture, vehicles, manufacturing machinery and equipment, trading
stock, raw materials, work in process and finished products. Various control systems of
an administrative nature can be established to control physical resources (in particular,
office furniture, equipment and vehicles) that normally appear on an asset register.
Control systems for these resources involve usage procedures, periodic inspections and
stocktaking, which often fall within the ambit of the internal audit. The control systems
for inventories, raw materials and finished products are inventory control and quality
control. Although inventory control falls within the field of purchasing and logistics
management, it is necessary to make a few remarks about it here.
INVENTORY CONTROL
Inventory refers to the reserves of resources held in readiness to produce products and
services, as well as the end products that are kept in stock to satisfy consumers’ and
customers’ needs. It normally refers to the four basic kinds of inventory (raw materials,
work-in-process, components and finished products), but it need not only have to do
with manufacturing. For an airline, a seat on an aircraft is inventory and an unsold seat
on a flight is a loss. By the same token, money in a safe in a bank is inventory that can
be lent to clients at a certain interest rate. Organisations keep inventories – and here the
word is used in a wide sense – mainly for the following purposes:
•To satisfy the needs of customers and consumers;
•In the case of raw materials and components, to keep uncertainties regarding
delivery and availability to a minimum so that the manufacturing process is not
interrupted; and
•As a hedge during times of high inflation.
The following three control systems are relevant in the control of inventory:
1.Economic-ordering quantity (EOQ), in use as early as 1915, is based on
replenishing inventory levels by ordering the most economic quantity. The
disadvantage of this control system is that inventory must be kept, regardless of
the needs of the manufacturing department or customer, for particular raw
materials, components or finished products. This means that items must be kept in
stock for indefinite periods in spite of efforts to keep inventory costs as low as
possible.
2.The materials-requirements planning (MRP) system was developed in the
1960s to eliminate the shortcomings of the EOQ control system. With this system,
an estimate is made of the demand for raw materials and the components
necessary to create a finished product. Inventories are ordered only when they are
needed and the costs of maintaining inventory levels over extended periods of time
are thus eliminated.
3.The just-in-time (JIT) system is a refinement of the MRP system. It originated
in Japan, where it was developed by Toyota in the 1970s. The JIT philosophy is the
same as MRP in the sense that organisations endeavour to manufacture products
without incurring significant inventory costs. However, in contrast to MRP, where
the need for raw materials and components is estimated and they are ordered
according to demand, JIT is based on the premise that actual orders for finished
products are converted into orders for raw materials and components, which
arrive just in time for the manufacturing process. A manager applying the JIT
principle orders materials and components more often in smaller quantities,
thereby reducing risk and investment in both storage and actual inventory.
An element that is closely intertwined with inventory control is quality control.
QUALITY CONTROL
Quality has become an increasingly important issue in management. The Tylenol
incident at Johnson & Johnson inspired the pharmaceutical-, food- and consumerproduct industries to introduce improved quality-control methods. The management
approach that emphasises the management of quality is known as total quality
management (TQM). Because of its importance, particularly in competitive
international markets, it is necessary to give a brief overview of quality control.
Japanese products were once regarded as cheap goods. Today, however, the quality
of Japanese products is acknowledged globally. Because of the success of Japanese
products, especially in the United States, western managers are realising, increasingly,
that access to international markets depends not only on mass production, but also on
quality. Whereas quality control was formerly the responsibility of a single department
or section, TQM means that quality is the responsibility of everyone in the organisation,
from the chairman of the board of directors down to clerks, purchasing
managers, engineers, and selling and manufacturing personnel. TQM emphasises how
managers can continuously improve an organisation’s work systems so that its products
and/or services are better able to deliver the quality desired by customers.
William Edwards Deming is known as the founder of the quality movement. The
example that follows illustrates Deming’s approach to the implementation of control
systems in organisations.
A strategic commitment on the part of top management will ensure that quality is
included in the mission statement of the organisation and transmitted to operational
levels. The ultimate test of product quality is in the marketplace, where it becomes
evident whether the product satisfies consumers’ needs. The discussion of the control of
the organisation’s physical resources highlights the complexity of controlling physical
resources as well as the importance of control in the success of the organisation.
Aspects of control are expressed mainly in financial magnitudes. Control of the
organisation’s financial resources is the next topic of discussion.
10.4.1.2The control of financial resources
An organisation’s financial resources are the second group of resources that
management must control. Financial resources and abilities are vital to the success of
the organisation and are at the heart of the control process, as Figure 10.2 indicates.
While financial resources are a group of resources in their own right, the control of
financial resources is central to the control of other resources of the organisation.
Financial control is concerned with the following aspects:
•Resources as they flow into the organisation (for example, returns on investments);
•Financial resources that are held by the organisation (for example, working capital
and cash); and
•Financial resources flowing out of the organisation (for example, the payment of
salaries and other expenses).
Each of these categories of financial resources is controlled so that revenues are
sufficient to cover expenses and show a profit. Incoming funds, which normally
represent revenue in the form of electronic transfers, cheques and cash, must be
controlled rigorously because this is an area in which fraud is often experienced. Funds
that are held by the organisation, such as working capital, should not be tied up in areas
such as outstanding debtors or slow-moving inventory. Of equal importance is the
control of outgoing funds (for example, salaries and expenses), which is also an area
where fraud and serious errors may be found.
Financial-management principles that deal with cash flows, cash management,
investment returns and so on can also be regarded as financial-control measures, but it
is beyond the scope of this chapter to deal with these issues in detail. However, since
financial control is pivotal to the control process, we will examine two instruments of
financial control: budgetary control and financial analysis.
THE BUDGET
As part of the planning process, management allocates financial resources to different
departments of the organisation in order to enable them to accomplish certain goals. By
allocating funds to specific activities, management can implement certain strategic
plans. This allocation of financial resources is done by means of the budget. From the
point of view of control, management wants to know how the financial resources are
applied. The budget is therefore used as an instrument of control.
A budget is a formal plan expressed in financial terms that indicates how resources
are to be allocated to different activities, departments or sub-departments of
an organisation. At the same time, it forms the basis for controlling the financial
resources, a process known as budgetary control. Budgets are usually expressed in
financial magnitudes, but can also be expressed in other units such as sales volumes,
units of production or even time. It is precisely because of the quantitative nature of
budgets that they provide the foundation for control systems. They provide benchmarks
or standards for measuring performance and making comparisons between
departments, levels and periods. More specifically, a budget makes the following
contributions to financial control:
Applying the concept W. Edwards Deming, founder of the quality
movement
Deming is well known for the ‘Red Bead Experiment’ that he often used at his four-day
seminars. In this experiment, ten volunteers are recruited to work in an ‘organisation’: six
willing workers, two inspectors, an inspector of the inspectors and one recorder. Deming
pours 3 000 white beads and 750 red beads into a box, where they are mixed together. Each
worker scoops beads out of the box with a scoop that holds 50 beads. Each full scoop is
considered to be a day’s production. White beads are acceptable; red beads are defects.
Workers are asked to scoop out only white beads and no red beads.
Of course, owing to the laws of statistical variability, each worker scoops out some red
beads, regardless of how motivated the worker is to get only white beads, how much the
‘manager’ (Deming) exhorts them not to or how much he praises workers who have fewerthan-average red beads. Deming’s message is simple: from a statistical point of view, it is
foolish for a manager to use data about the number of red beads any particular worker
produces as information for promoting or demoting workers. Rather, statistically speaking,
management should acknowledge the following truths:
1.There will always be variation in any process or system.
2.As a result, there will always be variation in the performance of workers (some will
perform well, and others will perform less well).
3.It is up to management to improve the system, not to reward and control the
individuals within the system.
Many organisations have enjoyed improved performance when implementing control
systems that are consistent with Deming’s principles. For example, the Ford Motor Company
found that transmissions manufactured according to these principles resulted in warranty
repairs decreasing tenfold, and that ‘things-gone-wrong’ customer reports dropped by 50 per
cent over a period of five years.
Source: Dyck, B. & Neubert, M.J. 2010. Principles of management. International Student Edition. Mason,
OH: South-Western Cengage Learning, p. 140. © South-Western, a part of Cengage Learning, Inc.
Reproduced by permission.
•It supports management in co-ordinating resources, departments and projects.
•It provides guidelines on the application of the organisation’s resources.
•It defines or sets standards that are vital to the control process.
•It makes the evaluation of resource allocation, departments or units possible.
Various kinds of budgets, some examples of which are provided in Table 10.1, can be
used to make financial control possible across the financial spectrum.
Table 10.1: Types of budgets
Type of budget
Focus
Examples
Financial budgets
•Cash flow
•Capital expenditure
•Cash-flow budg
•Capital budget
Operational budgets
•Revenue
•The operational aspects of the organisation
•Sales budgets
budgets
Non-financial
budgets
•Diverse aspects of the organisation that are not expressed in
financial terms
•Production bud
•Sales volumes
•Time projection
Budgets were traditionally developed in a top-down fashion, where top management
would develop the budget and impose it on the rest of the organisation. However, the
way budgets are set today, especially in larger organisations, is to involve all managers
of operating units, from the bottom to the top, in the budget process. A great deal of
interaction takes place between heads of operating units (supervisory management),
dimensional heads (middle management) and top management. The budget is usually
set by a budget committee consisting of top managers. It is here that members of top
management implement their strategies, which they do by allocating financial resources
to the areas or divisions that must lead the organisation’s strategy.
Budgets have a number of strengths, as well as weaknesses. The most important
advantage of a budget is that it facilitates effective control by placing a money value on
operations, enabling managers to pinpoint problems. Budgets also facilitate coordination between departments and maintain records of organisational performance.
On the negative side, however, budgets may sometimes limit flexibility.
Budgets are not the only instrument that management uses to apply financial
control. To complement the budget, management can use financial analysis, also
known as ratio analysis, to apply financial control. This will be discussed in Chapter 14.
10.4.1.3The control of information resources
All the functions of management (planning, organising, leading and controlling) are
dependent on supporting information in order to function effectively. However, it is the
relevant and timely information that is made available to management during the
management process that is vital for monitoring how well the goals are accomplished.
Accurate and timely information allows management to implement plans and determine
on a continuous basis whether everything is proceeding according to plan, and whether
adjustments need to be made. The faster management receives feedback on what is
going smoothly or badly in the course of the management process, the more effectively
the organisation’s control systems function.
10.4.1.4The control of human resources
Although the control task of management focuses mainly on financial and physical
resources, this does not mean that the performance of one of the organisation’s main
resources – people – is exempt from control. A few remarks will be sufficient to
emphasise the scope of control of human resources throughout the organisation.
The main instrument used to control an organisation’s human resources is
performance measurement.
This entails evaluating employees and managers in the performance of the
organisation. More specifically, from a control point of view, the performance of
individuals and groups is assessed and compared with predetermined standards. Tasks
are subdivided into components. The importance of each subtask is determined so that
criteria and measuring instruments can be developed. Performance standards must
then be developed – for example, 40 production units per hour, an accuracy level of 98
per cent in tuning machines, or a quality level of at least 93 per cent. Actual
performance can be measured against these standards for feedback to, and action by,
management.
Other human-resources control instruments include specific ratio analyses that
can be applied in respect of labour turnover, absenteeism and the composition of the
labour force.
The preceding discussion of the control of an organisation’s resources mainly
emphasises the formal control systems developed by management. As far as informal
control systems are concerned, however, people in the organisation play a decisive role
in social-control mechanisms. This refers specifically to group behaviour. When a group
of people work together on a regular basis, they develop norms that lay down guidelines
for the behaviour of the group. These norms, which may include the quality of products,
speed of production and reliability, are usually not written down and have nothing to do
with the formal organisational structure. Nevertheless, they have a profound influence
on the behaviour of groups when it comes to control or social control. Members of the
group subject themselves to the norms of the group because, if they do not, they may be
punished by the group in ways that range from light-hearted teasing to outright
rejection. Compensation by the group for group cohesiveness and control consists of
approval of action, emotional support and the assignment of a leadership role to the
leader of the group.
The above discussion of the areas of control provides an overview of the control
process as it applies to the organisation’s different resources and of some of the
instruments that enable management to control resources.
10.5Characteristics of an effective control
system
The following are characteristics of an effective control system:
•Integration;
•Flexibility;
•Accuracy;
•Timeliness; and
•Simplicity.
These characteristics are discussed in more detail below.
10.5.1Integration
A control system is more effective when it is integrated with planning, and when it is
flexible, accurate, objective, timely and simple. The interface between control and
planning is discussed in the introduction to this chapter. Control complements planning
because deviations highlight the need to review plans and even goals. In this way,
control provides valuable inputs to planning. The closer the links between control and
planning, the better the eventual control system will be. This is why provision should be
made at the planning stage to make control possible, for example, by formulating goals
in such a manner that they can be converted into, or applied as, control standards. This
means setting quantifiable goals. Figure 10.3 shows how planning and control should be
integrated.
Figure 10.3: Integration of planning and control
10.5.2Flexibility
The second characteristic of an effective control system is flexibility. This means that
the system should be able to accommodate change. Timeous adjustments in objectives
or plans should not be regarded as deviations, but as revised objectives or plans. The
control system should be able to adjust to such revisions, within limits, without
management having to develop and implement an expensive new control system.
10.5.3Accuracy
A control system should be designed in such a way that it provides an objective and
accurate picture of the situation. Errors or deviations should not be concealed in the
data. A total amount expressed in rands certainly does not show a profit, nor does it
indicate which products sell better than others. Similarly, production management can
conceal indirect costs to make production performance look good. Inaccurate
information leads to incorrect modifications of new plans based on unreliable control
data.
10.5.4Timeliness
Timely control data are not obtained by means of hasty, makeshift measurement.
Control data should be supplied regularly, as needed. A sensible approach is one that is
based on the principle of timeliness.
10.5.5Simplicity
Unnecessarily complex control systems are often an obstacle because they can have a
negative influence on the sound judgement of competent managers. If managers are
hampered by red tape, they may leave the system to keep things going. In so doing, they
may lose their personal involvement and motivation to see to it that things proceed
according to plan. Unnecessary control is equally demotivating for personnel and leads
to resistance to control systems. Too much information, especially if it is
irrelevant, makes great demands on the time and attention of management, which
means that the control process becomes too expensive. The unwritten rule of effective
control is that control should not become so complex that the implementation of the
control system becomes more expensive than the benefits derived from it. At the same
time, a system should not be oversimplified to the extent that the essence of control is
lost.
10.6Summary
Control is one of the four fundamental management functions. It is the final step in the
management process, and the starting point for planning and strategic development.
The control process narrows the gap between planned performance and actual
performance by setting performance standards in the right places. The performance of
management, employees and resources can be measured against these standards and
deviations can be rectified if necessary. Control focuses on virtually every activity or
group of activities in the organisation, but normally aims at physical, financial,
information and human resources. Effective control systems are characterised by the
extent to which planning and control are integrated, as well as the flexibility, accuracy
and timeliness of the system. Management information plays an important role here.
However, too much information, especially irrelevant information, demands too
much time and attention from management, which makes it too expensive. This ties in
with the unwritten rule pertaining to control: the application of the control system
should not become so complex that it costs more than it saves. At the same time, the
system should not be oversimplified to the point of losing its significance.
This discussion of control as the final fundamental element of management
completes the examination of the management process, and with it, Part 2 of this book.
It should be clearly understood, however, that the general principles forming the
subject of this section are also relevant in Part 3, which deals with the specialised or
functional areas of management. Less detail from this section is provided when
discussing, say, financial planning or marketing control, where the emphasis in the
treatment of different business functions falls mainly on the activities peculiar to a
particular functional area.
Small business perspective
Success is well understood in areas such as sport, music and academic achievements.
Success is often defined as the achievement of realistic goals. Thus, if a person sets out to
achieve a specific goal, and then attains this goal, he or she is perceived to be successful.
Failure happens when goals are not achieved.
The control process of a small business will be no different from the control process of a
medium-sized or large business. Although the steps followed in the control process will be
the same, the application of these steps in a small business will be different. In what follows,
we examine the steps in the control process of the small business.
Step 1: Set goals and standards against which the actual performance of the small
business can be measured. Generally, standards and goals for the entrepreneurial venture
can be classified into personal, financial and strategic goals. Personal goals refer to the
initial motivation for starting the new business, such as a need to survive, the drive to
develop new products and/ or services, or the need to be financially independent. Financial
goals differ widely between different small business ventures. A micro business or spaza
shop may have survival as its only financial goal, whereas a small business may be able to
generate regular and sustainable profits over a period of time. Lastly, the strategic goals of a
small business pertain to its long-term survival within a constantly changing environment.
Step 2: Measure the actual performance of the small business. This step involves
the measurement of the personal, financial and strategic performance of the small business.
All businesses, including small businesses, aspire to perform well in all three areas.
Step 3: Evaluate any deviations that might occur between set standards and actual
performance of the small business. Should the small business perform well in terms of its
personal, financial and strategic goals, shareholders will be satisfied with their investment.
Should there be any deviations between actual and planned performance and
underperformance is detected, steps need to be taken to rectify the deviations. Usually signs
of underperformance in a small business are decreasing financial performance (such as
decreasing gross and net profit margins), cash-flow problems and negative cash flows for
long periods of time, which may lead to failure and a total loss of control.
Step 4: Take steps to rectify deviations. Underperformance can be addressed in
various ways. First, the entrepreneur needs to investigate the relationship between the
selling price, cost, sales volume, and fixed and variable costs associated with the product
and/or service. Furthermore, the entrepreneur should determine whether the business is
viable and economically sound. Attention should be directed to improving the cash flow,
sales volume and market share of the small business. Confidence in the venture and the
entrepreneur is crucial for handling underperformance. When confidence is lost, it is very
difficult to rectify. The small business may experience resignations from core staff, and
external stakeholders may want to take their funds out to reinvest them in safer options.
Turning an ailing small business around and putting it back on track is a difficult task. The
principles for turning an underperforming small business around revolve around the
following: management focus; careful financial management practices and principles; a
focus on the core business of the venture; formulating and implementing a real turnaround
strategy; and speed.
KEY TERMS
accuracy
economic-ordering quantity
actual performance
flexibility
budget
integration
control
inventory
control by exception
just-in-time system (JIT)
control of financial resources
materials requirements planning
control of human resources
quality control
control of physical resources
simplicity
corrective action
standards
deviation
timeliness
Questions for discussion
Reread the case study on page 292 and answer the following questions:
1.What steps did Tom Boardman take to turn Nedbank around?
2.Identify the key areas of control in Nedbank.
3.How did the control process implemented by Tom Boardman provide feedback
for the revision of planning?
4.Explain the characteristics of an effective control system.
Multiple-choice questions
1.Which statement is false?
a.Control helps organisations to cope with environmental change.
b.Control systems increase costs in an organisation.
c.Control helps an organisation to cope with increasing organisational size and
complexity.
d.Control helps to limit the accumulation of error.
2.Financial budgets focus on __________, whereas operational budgets focus on
__________.
a.revenue, capital expenditure
b.sales volume, time projection of projects
c.cash flow, revenue
d.capital expenditure, cash flow
3.An effective control system is:
a.integrated with planning.
b.able to accommodate change.
c.objective.
d.all of the above.
4.Control systems for __________ involve usage procedures, periodic inspections and
stocktaking.
a.human resources
b.physical resources
c.information sources
d.financial resources
5.Evaluating deviations is step _____ in the control process.
a.one
b.two
c.three
d.four
CHAPTER 11
Operations management
Louis Krüger and Rigard Steenkamp
The purpose of this chapter
This chapter provides a broad overview of important aspects covered in the sub-discipline of
operations management. It considers the nature of operations management and provides
some definitions of related concepts, and it depicts an operations-management model and
discusses each of its components individually. The chapter also classifies different process
types for manufacturers and service providers. It then focuses on the three main activities of
operations management: operations design, operations planning and control, and operations
improvement. Selected tools, techniques and methods that can be used in performing these
activities are also introduced.
Learning outcomes
On completion of this chapter you should be able to:
•explain why operations management is important for a business
•define what operations management encompasses
•identify and explain the components of an operations-management model
•distinguish between the six general operations-management performance objectives
and explain what each entails
•explain how systems for classifying process types in manufacturing and services may
assist operations managers
•identify the aspects involved in operations design
•explain how these aspects need to be managed in order to develop an effective design
for products and services, including the processes for their manufacture or delivery
•identify the aspects involved in operations planning and control
•explain how these aspects need to be managed to manufacture or deliver products and
services efficiently
•identify the aspects involved in operations improvement
•explain how these aspects need to be managed in order to provide a more effective and
efficient operation for the manufacture of products and the delivery of services for
competitive advantage.
11.1Introduction
A business transforms inputs from the environment into outputs to the environment.
The operations function is that function of the business aimed at executing the
transformation process. The operations function and the management thereof
(operations management) are therefore directly concerned with creating products and
providing services in order to realise the objectives of the business.
11.1.1The importance of operations management
An effective and efficient operation can give a business four types of advantages:1
1.It can reduce the costs of making the products or offering the services. (As profit
equals revenue minus costs, reducing the costs of production by being more
efficient and having less waste, rework, scrap, spillage and so on will directly
contribute towards the profitability of production.)
2.It can increase the revenue the business receives for offering its products and
services to its customers/clients. (According to the profit equation given above,
increasing sales through superior-quality products and service excellence, or just
by offering ‘good value for money,’ again directly contributes towards the
profitability of a business.)
3.It can reduce the amount of investment (capital) needed to manufacture the
type and quantity of products or to offer the service required. (Increasing the
effective capacity of the operation by better use of facilities, machines or
equipment, and seeking new ways and procedures to optimise the functioning of
the operation, may decrease the amount of capital required for investment in the
acquisition and running of these facilities, machines or equipment.)
4.It can provide the impetus for new innovation by using its solid base of
operational skills and knowledge to develop new products and services. This can
involve manufacturing’s production capability or the offering of new products and
services in accordance with international best standards and practices.
Other reasons that operations management is considered important to a business
include the following:
•Operations management can improve productivity. Productivity, measured as the
ratio of output to input, is a yardstick for the efficacy with which operations
management transforms (or converts) the resources of a business into products or
services. If a business produces more error-free outputs with less wastage of
material inputs, or puts its manufacturing staff to better use, its overall productivity
will improve. Higher productivity, in turn, is directly related to increased
profitability for businesses, which benefits the country in which the business
operates.
•Operations management can help a business to satisfy the needs of its
customers/clients more effectively. The customer/client is an important focal point
in operations management, and the operations manager should see to it that quality
products or services are provided for the consumer at a reasonable price. Satisfied
customers/clients are of crucial importance to any business since its long-term
survival or existence is dependent on them. Businesses will endeavour, by means of
their particular operations skills, to satisfy the needs of their customers/clients
more effectively than their competitors do.
•Operations management can be decisive for the general reputation of the business.
Some businesses have, through their particular operations skills, built up
outstanding reputations as far as high-quality products or services, low costs, or
simply ‘good value for money’ are concerned. The operations skills of a business
make (and also break) such reputations. Businesses such as Woolworths and
Panasonic have built up exceptionally good reputations for high quality and, for such
businesses, quality is a competitive advantage that can be used to protect and
further expand their market position.
Critical thinking
The importance of operations management
While an effective and efficient operation can give a business several types of advantages,
how important is operations management really? Is it more important than marketing,
finance and other management functions?
Some people argue that nothing is possible without a good idea, while others say that
without money, nothing is possible. Some see operations management as a dynamic and
creative discipline: if human beings are seen as the rulers of creation, then operations
management brings humans as close as they can be to the act of creation and creating
value.
Business life is primarily concerned with creating products and services, putting
operations management at the heart of its existence. All managers directly and indirectly
create products or services, be they through micro- or macro-processes, for internal or
external customers. In this sense, all managers can be viewed as operations managers.
Every manufactured thing people see around them, sit on, eat, read, wear, buy and enjoy
comes to them courtesy of operations managers who planned and controlled the production
system involved.
11.1.2Defining terms used in operations management
There are many definitions of operations management. A common characteristic of all
these definitions is that operations management is concerned with the management of
the transformation process (the operations process) whereby products are
manufactured, or services rendered. To clarify further what is meant by operations
management, the following concepts are defined:2
•The operations function is that function in the business primarily aimed at the
utilisation of resources to manufacture products or render services.
•Operations managers are the personnel in the business who are directly
responsible for managing the operations function.
•Operations management (the operations-management function) involves
operations managers’ activities, decisions and responsibilities that tie in with the
execution of the operations function. The operations-management process includes
operations planning, operations organising, operations scheduling and operations
control.
CASE STUDY: Noise clipper: A solution for noise in manufacturing
Noise Clipper (Pty) Ltd was awarded the AHI Business of the Year award after successfully
responding to a global noise control problem. The South African company is situated
between the Innovation Hub and the CSIR in Pretoria. Noise pollution is a major global issue
and more workers are exposed to potentially dangerous noise levels today than to similar
levels of any other noxious agent. Factories and mining operations are noisy environments,
and environmentalists and governments take finding solutions for noise pollution and the
resultant noise-induced hearing loss (NIHL) very seriously. NIHL compensation statistics are
extremely high, and the insidious nature of NIHL makes it a deceptively dangerous ‘silent
disease’.
The noise problem
A great deal of progress has been made in noise control, yet it seems the challenge
remains. Busy factories easily generate harmful noise above 85dBs. The social environment
has also changed in terms of a demand for noise. Exposure to social noise has increased in
recent decades due to high exposure levels to discotheque music, rock concerts and music
from personal music players. Attempts to regulate certain mobile music devices are being
investigated by the Belgian government.
A number of pharmaceutical companies (and venture capital investors) continue to
pursue drug therapy in their search for developing an oral capsule for NIHL. The military is
also seeking a drug that will prevent hearing loss if taken just before noise exposure, or for
treatment after exposure. The mining of minerals has always been an arduous task and is
very much still a ‘pick and shovel proposition’. Noise has become a generic hazard common
to commodities but to a greater extent to mining operations. The highest noise exposure
(from 100 dBs and above) from plant and equipment is associated with loaders, long-wall
shearers, chain conveyors, fans and pneumatic percussion tools. Unfortunately, workplace
injuries, illnesses and fatalities still occur worldwide, causing immeasurable pain and
suffering to employees and their families.
Addressing the problem
OHS (occupational health and safety) is therefore crucial in terms of a multidisciplinary
function involving the social, mental and physical well-being of employees. It endeavours to
protect all employees, family members, customers, suppliers, communities and other
members of the public affected by the workplace environment. The challenge to create and
sustain a healthy and safe workplace is increasing in terms of a culture shift towards the
human element, philosophy of work and productivity by means of a sound OHS culture.
Responding to the market
Innovation is the planned action of bringing about new ideas, methods, products and
services. The terms associated with innovation are ‘re-creation’, ‘adaptation’, ‘imitation’ and
‘invention’. Some regard innovation as the DNA of the modern organisation. Innovation has
no recipe and is a complex concept that is difficult to define. The idea is to innovate or
stagnate, which implies creativity and change. Noise Clipper strategically positioned itself to
design and develop their own products and process technologies (machines) to assist their
manufacturing and service delivery processes. Their forms of innovation can be categorised
into the degree of novelty or the scope of innovation leading to categories such as
incremental innovations, modular innovations and radical innovations.
In-field research by audiologists revealed the need for a hearing protection device (HPD)
that is not a one-size-fits-all. Noise Clipper researched the weaknesses of conventional
products, and they used several benchmarks of high quality products from Europe. This
assisted them in conceptualising a product for the local market. The idea was to design and
patent a high quality HPD for African conditions that is more appropriate and cost-effective
than current European products (such as Variphone). This implies a custom-made HPD with
several unique quality dimensions. The first of these dimensions is a HPD that is
personalised and tailor-made for attenuation, comfort and pride. These dimensions will
increase user-friendliness and wearability. To achieve this, the Noise Clipper includes the
following characteristics:
•Physically sized for comfort, with consistent (low variability) tailor-made sizing.
•The elimination of leakages as verified by a seal-test (measured) and correct fitment.
•Attenuation must be adjusted for the individual’s specific circumstances and working
zone. Overprotection is minimised to optimise communication (speech discrimination)
and the detection of machines and warning signals. An HPD must accommodate
communication while protecting against noise because signal detection, signal
localisation and speech discrimination (speech intelligibility) are crucial aspects of fitness
for duty and productivity.
•Adjustable attenuation by means of filter mechanisms of which the calibration setting is
both fiddle- and tamper-proof (not adjustable to eliminate re-calibration and additional
servicing costs). The filter is not calibrated at the premises of the client.
•The Noise Clipper is made in different colours (chosen by the worker) with each user’s
name imbedded in the product.
•It is cost-effective solution because of durability; the average price of R400 is compared
to the estimated R3000 of conventional products (calculated at a cost of R4 per day
times 250 annual working days for a three year period).
The HPD is a catalyst for a hearing conservation programme (HCP)
A huge effort is required to provide effective hearing conservation programmes (HCP).
Several mining operations have started outsourcing this service and Noise Clipper has
recognised the potential in diversifying by providing a professional HCP service to
complement its product. They benchmarked against a ‘best practice’ programme awarded by
the European Agency for Safety and Health at Work (EU-OSHA). The programme is based
on four dimensions, and the model has been adopted (and adapted) in many mining
operations in South Africa and other manufacturers worldwide. The primary dimensions of
this programme are: (1) corporate social responsibility (CSR) and top management
(shareholder) support, (2) coaching based on personal risk profiles for curative care and
prevention, (3) otoacoustic emissions (OAE) to proactively determine the status of the
cochlea and the condition of the ear, and (4) custom-made HPDs.
Noise Clipper is therefore a good example of servitisation in terms of the importance of
both the product package and the service package. The product quality is dependent on the
quality of the initial service (gaining personal information and the impression made by the
field workers), the transformation process (of the acrylic HPD product; assembled, calibrated
and packed) and the final service operation (dispatch, scheduling of the fitment and seal test
process). Servitisation is a good strategy because it opens doors for product/service
diversification and product/service differentiation.
The operations system
The characteristics of the Noise Clipper operations system are:
•To be responsive and flexible when the market demands bigger batch sizes. This is
done through project management and adjustable capacity strategies (detailed planning
and scheduling of the service operations for the fitment of large quantities based on the
predetermined mining shifts). In such cases the scope of the job allows Noise Clipper to
manage contracts as small projects and adapt to a resource-to-order operation.
•Innovation, creativity and additional value creation by its own employees. The design
and development of the ‘Sealometer’ (to do seal tests) and the ‘Calometer’ (to calibrate
filters) are examples of process technologies originating from Noise Clipper staff.
•Marketing through high service quality (reliability, responsiveness, and so forth). More
orders are generated due to the effective and professional services delivered by the field
workers at the plants.
•A typical batch operation with a process layout to produce small quantities per day. The
operation is labour intensive because of the custom-made process. Capacity can fairly
easily be adapted to meet demand.
•Elimination of waste, small batch sizes and the use of the JIT philosophy for lean
manufacturing.
•Short lead times are the norm, although they are a make-to-order business.
Source: Personal interviews with the management of Noise Clipper namely the CEO, Mr Albert Lotter,
Persequor Park, Pretoria, 2018. Reprinted by permission of Mr Albert Lotter.
11.2An operations-management model
Figure 11.1. shows an operations-management model3 that illustrates the
management of the operations function. The most notable elements of this operationsmanagement model are the operations-management strategies and objectives, and the
management activities that influence the transformation process that produces outputs.
11.2.1Operations-management strategies and performance
objectives
All businesses formulate business objectives, and if a business intends surviving in the
long term, consumers who are satisfied with the business’s products or services should
be a top-priority objective. The operations-management function should take
cognisance of customers’/clients’ needs and continually formulate its management
strategies and objectives in such a way that the competitive position and
customer/client base not only remain intact, but, where necessary, are also
strengthened and expanded.
Figure 11.1: A general model of operations management
Source: Adapted from Slack, N., Chambers, S. & Johnston, R. 2004. Operations management. Fourth
edition. Harlow: Financial Times Prentice Hall, Figure 1.1, p. 5. Reprinted by permission of Pearson
Business.
Although customer/client needs are numerous, they can be reduced to six main
elements:4
1.Higher quality
2.Lower costs
3.Shorter lead time (quicker manufacturing or provision of services)
4.Greater adaptability (flexibility)
5.Lower variability with regard to specifications (reliability)
6.High level of service (better overall service).
With these six customer/client requirements as a basis, operations-management
performance objectives can be formulated to give the business an operations-based
advantage over other businesses. Managing operations for competitive advantage or as
a ‘competitive weapon’ is an imperative for modern businesses in the face of increased
global competition, rapid technological change, and the higher visibility and importance
of ethical business practices, workforce-diversity issues and environmental-protection
concerns.
Operations-management performance objectives must therefore indicate the
specific areas within the domain of the operations function that will be emphasised
when products and/or services are produced or provided.
The operations-management performance objectives are formulated in such a way
that they are applicable to both manufacturers and service providers. To acquire
operations-based advantages, the following six general operations-management
performance objectives (which incorporate the above-mentioned customer/client
needs) can be followed:
1.Do things right the first time. This means that the operations function should
not make mistakes. By providing error-free products and services that are ready
and suitable for consumption by customers/clients, the business will gain a quality
advantage. Higher quality not only means increased error-free outputs resulting in
lower costs, but also an improved competitive position, which could lead to higher
prices and a greater market share. Think again of Woolworths’ food products in
this regard. This business is certainly one of the best known for providing topquality food products, for which some consumers are prepared to pay higher
prices.
2.Do things cost effectively. It is imperative that products and services be
produced or provided at a cost that will enable the business to place them on the
market at a price that will ensure an acceptable profit for the business. This also
applies to non-profit organisations because taxpayers and funders insist on good
value, which they will receive only if institutions function cost effectively. Hence,
when the operations-management function operates cost effectively, it can provide
the business with a cost advantage. However, when this does not happen – for
example, in the case of a gold mine where the cost per metric ton of mined goldbearing ore is too high to run the mine profitably – drastic cost-saving measures,
such as the large-scale retrenchment of miners, are necessary. In the case of
PetroSA, for example, where the high procurement cost of gas and oil made the
project uneconomical, the state had to subsidise the project continuously at the
expense of the taxpayer.
3.Do things quickly. This means that the period of time that elapses between the
demand for a product or service and the delivery thereof should be as short as
possible. Put differently, the lead time should be shortened. This will increase the
availability of the products and services and will give the business a speed
advantage. Businesses that do not place their products and services on the market
quickly enough will not only have to accept lost sales initially, but will, later on, also
have to overcome strong competition from established brands. Think, for example,
of a paving construction business that promises to have a new driveway paved in
three weeks, but then takes seven weeks to complete the job. Would you
recommend this business to your friends? Businesses such as Boss Paving, which is
reputed to complete paving faster than its competitors, acquire a speed advantage
from which they will later build up a sound reputation in the market.
4.Make changes quickly. The operations-management function should be able to
adapt or change activities if unforeseen circumstances make it necessary to do so.
This applies, for example, when more customers/clients demand a product or
service, or if a customer/client requires the delivery of a wider variety of products
or services within the agreed time. If the operations-management function can
change activities in this way to satisfy customer/client demands both quickly and
adequately, the business will have an adaptability advantage. During the 2010 FIFA
World Soccer Cup held in South Africa, businesses reacted quickly to the sharp
increase in overseas visitors, and car rental companies such as Avis, for example,
were able to cope with the sudden increased demand for rental cars. Businesses
such as Toyota and Ford, in turn, are known for their ability to adapt their product
line quickly to changing customer needs, as in the case of the Toyota Aygo and the
Ford Fiesta, both of which met the need for a more economical car.
5.Do things right every time. Error-free products and services that satisfy set
specifications should regularly and continuously be provided to customers/clients.
This gives the business a high-reliability or low-variability advantage. This
guideline ties in with the customer/client requirement of high quality. However, it
emphasises the ability of the business to meet specifications continuously in the
long term. This is of particular importance to businesses that produce or provide
products or services on a continuous (or mass) basis. Take the example of
McDonald’s Big Mac hamburgers. McDonald’s is an international business that
claims that a Big Mac will taste the same in any place in the world where business
is conducted. Thus, when people buy their second Big Mac, they will know exactly
what they are getting. South African Airways (SAA) also strives for low variability
in respect of times of scheduled departures to various destinations. If SAA’s flights
over a period of a year, for example, depart on schedule and reach their
destinations 85 per cent of the time, one could therefore say that the airline
renders a more reliable service compared to other domestic carriers like Mango
(78 per cent), Kulula (74 per cent) and S.A. Express (72 per cent).5
6.Do things better. With due regard to all the preceding operations-management
guidelines, a business will also endeavour to provide a better total product or
service package compared to that of its competitors. This gives the business a
service advantage. Think of businesses such as M-Net and BMW, which have gained
reputations because they stand out above their rivals as far as service is concerned.
This guideline is closely intertwined with the concept of total quality management
(TQM), which is, today, the focal point of many top businesses internationally.
TQM’s point of departure is that quality products or services cannot be produced or
provided unless the whole business (all of the different functional-management
areas) works together to achieve this goal. TQM will be discussed in more detail in
Section 11.6.3.
Figure 11.2 illustrates the positive results that can be obtained by each of the abovementioned operations-management performance guidelines.
Figure 11.2: Positive results obtained by the application of operations-management
guidelines
Source: Adapted from Slack, N., Brandon-Jones, A. & Johnston, R. 2013. Operations management.
Harlow: Pearson Education Limited. Table 4.1, p. 99. Reprinted by permission of Pearson Education
Limited.
11.2.2The transformation model
The operations function is primarily concerned with using resources (inputs) to provide
outputs by means of a transformation process. Therefore, the transformation
model comprises three main components: inputs, the transformation process itself and
outputs.
A basic transformation model (also referred to as an input-transformation-output
model) is depicted in Figure 11.3. This model can apply to both manufacturers and
service providers.
11.2.2.1Inputs
Inputs used in the transformation process comprise both the resources that are to be
transformed (processed, changed or converted) and the resources required to make the
transformation possible.
The resources to be transformed include the following:
•Material. A wide variety of material, both processed and unprocessed, can be used
as inputs in the transformation process. For example, a motor manufacturer will use
mainly processed material such as steel, glass and plastic, while a gold mine will use
primarily unprocessed material (gold ore). For a service provider such as a
hairdresser, different hair products, for example, shampoo and tinting agents,
represent the material inputs.
•Customers/clients. Clients can serve as the inputs in the transformation process
when the client is the subject being transformed or ‘processed’. For example, the
client who receives dental treatment is the primary input in the transformation
process. The same applies to recreational facilities such as gymnasiums and
recreational events such as rock concerts because the client is the most important
input who is transformed through being exercised or entertained.
•Information. Information can either be the primary input that is transformed, as
when information is processed into news for a newspaper, or it can be used as the
secondary input in a transformation process, as when information about consumer
preferences regarding vehicle colours is used when a vehicle is processed.
Figure 11.3: A basic transformation model
Source: Adapted from Knod, E.M & Schonberger, R.J. 2001. Operations management: Meeting
customer’s demands. Seventh edition. (International Edition). McGraw-Hill Higher Education. Adaptation of
Exhibit 1-4 on Page 12a. Reproduced with permission of The McGraw-Hill Companies through Copyright
Clearance Center.
The resources required to make transformation possible include the following:
•Human resources. In most transformation processes, some or other form of
human involvement is necessary. This includes both workers who are physically
involved in the transformation process and the people involved in a supervisory
capacity. Some manufacturing processes are more labour intensive than others. A
gold mine, for example, is more labour intensive than a motor-vehicle
manufacturing plant, where many of the processes have been automated. Service
providers such as hotels are normally also labour intensive, and the service sector is
therefore seen as the sector with the most potential for job creation.
•Equipment and facilities. Equipment and facilities can assume many different
forms. For example, manufacturers use factories, machinery and equipment;
hospitals use wards, examination rooms and operating theatres; banks use offices,
computers and telephones; restaurants use eating areas, tables, chairs, grills, serving
counters and take-away counters; universities use lecture halls, laboratories,
theatres and sports fields; and supermarkets use shopping areas, storage rooms,
display areas, shelves, aisles and cash registers.
•Technology. The role of technology as an input in the transformation process is
becoming increasingly important. Technology is generally used to enable the
transformation process to function more efficiently. Thus, new knowledge and
techniques (automation) can help a manufacturer to manufacture better products of
higher quality more quickly. Service providers can also apply technology (for
example, satellite communication) to render better services more quickly.
11.2.2.2The transformation process
The transformation process converts inputs into outputs. The nature of the process is
determined by which type of input is predominantly being processed.
When materials are transformed, the transformation process is primarily geared
towards changing their physical characteristics (shape or composition). Most
manufacturers, such as motor-vehicle or furniture manufacturers, employ such
transformation processes. Service providers that also fall into this category include
those that involve materials changing location (a delivery business), changing
ownership (wholesalers and retailers) or primarily being stored (warehouses).
When information is transformed, the primary input is being processed. This occurs
when information changes in composition or shape (for example, an auditor’s report),
changes ownership (for example, a market-research publication), is disseminated and
changes location (for example, telecommunication) or is merely stored (for example, a
library).
When customers/clients are transformed, this may also occur in a variety of ways.
Some processes change the physical characteristics of clients (for example,
hairdressing), while others change their physiological condition (for example, medical
treatments at hospitals) or emotional condition (for example, entertainment at
cinemas).
The location of clients can also be changed (for example, by airlines) or they can
merely be ‘stored’ or accommodated (for example, in hotels).
11.2.2.3Outputs
The ultimate goal of any transformation process is to transform inputs into
outputs. Outputs assume the form of products or services. Manufacturers normally
produce certain products (for example, motor vehicles or furniture), while service
providers render certain services (for example, haircuts or transport).
The characteristics of products and services differ in ways that have specific
implications for the management of the various operations processes.
The important differences between products and services need to be clearly understood
through a comparison of the two; that of the products of the manufacturer and services
provided by the service provider. The manufacturer’s product exists physically, is longlasting, and the output is held as stock, whereas a service is intangible, perishable, and
the output is not held as stock. The manufacturer has very little customer contact,
whereas the service provider is heavily involved with customers. A product is
manufactured before use, whilst the provision and consumption of a service is
simultaneous. There is a long response time for manufacturing, and a short response
time for service delivery. Local and international market opportunities may be
considered by the manufacturer, whereas a service is usually provided in local markets.
The manufacturer often needs large production facilities, involving capital- and labourintensive production, whereas the service provider generally needs less working space,
but may be more labour intensive. Quality measurement is fairly straightforward to
measure in manufacturing, but can be difficult to measure in service delivery.6
The differences listed above represent two extreme positions on a continuum between
pure product manufacturers and pure service providers. In practice, however,
businesses are, to a greater or lesser degree, involved in both the manufacture of
products and the provision of services.
The transformation process, which comprises three main components of inputs, the
transformation process and outputs, has already been explained. Table 11.1 provides
examples of the inputs, the nature of the transformation process and the outputs of a
variety of businesses.
Table 11.1: Inputs, transformation processes and outputs of various businesses
11.2.2.4Different operations have different characteristics
While the basic purpose of all operations is similar in that they transform inputs into
outputs, the processes may differ fundamentally in four ways (the four Vs):7
1.The volume of output may differ. This refers to the number of items produced
by the operation over a given period of time. The more of one type of product that
is made, the greater the benefit that may be obtained through standardisation and
repeatability of the tasks and procedures. The most important implication of this
characteristic with regard to the operational process is its influence over the cost of
making a product or delivering a service: a lower production cost per unit is
possible as fixed costs are spread over a larger number of units. The volume of
output may range from high (for example, 220 motor vehicles per day) to low (for
example, 20 aeroplanes per year).
2.The variety of output may differ. This refers to the range of different items
produced by the operation over a given period of time. The more types of products
made by the same operation, the greater its flexibility and ability to provide nonstandardised products or services – though these will inevitably come at the price
of a higher cost per unit of manufacture or delivery. The most important
implication of this characteristic with regard to the operational process is its
capability of matching its products and services to the exact needs of
customers/clients. Variety of output may range from high (for example, a taxi
service to and from any location in and around Johannesburg) to low (for example,
a fixed route and time schedule for a metropolitan bus service).
3.The variation of output may differ. This refers to the particular demand pattern
for the output of the operation, which may be constant or may be highly irregular,
non-routine and unpredictable. The most important implication of this
characteristic with regard to the operational process is the possibility of a sudden
and dramatic change in the operations capacity required to supply products and
services in order to meet the needs of customers/clients. Operations likely to
experience seasonal variations (for example, hotel resorts in coastal locations)
must be able to deal with marked variation in demand levels, from full occupancy
during peak season to underutilisation for the remainder of the year. Other hotels
located in city centres may have constant patronage from business guests during
most of the week and utilise special tariffs over weekends to level the demand. In
the latter case, the unit costs will be lower than those of a comparable hotel with a
highly variable demand pattern.
4.The visibility of output may differ. This refers to how much of the
operation’s activities the customers/clients experience themselves or are exposed
to. In high-visibility operations, the customers/clients experience most of the
value-adding activities first-hand or directly, for example, in a designer’s weddingdress shop. This type of operation must be able to deal with a short waiting
tolerance compared to low- or zero-visibility operations, with which the
customer/client does not have much contact, as in the case of a larger
departmental clothes store, or no contact at all, as in the case of a catalogue
clothing retailer.
The implications of these four Vs of operations can be quite significant in terms of the
cost of creating the products and services. While high-volume, low-variety, lowvariation and low-visibility operational processes keep processing costs down, low-
volume, high-variety, high-variation and high-visibility operational processes generally
have a ‘cost penalty’ (as explored in the box that follows).
Two service providers with very different models
The University of Pretoria (UP) is the largest contact residential university in South Africa’s
tertiary education sector, with more than 53 000 residential (undergraduate and
postgraduate) students.8 The University of South Africa (Unisa) is the largest open distance
learning (ODL) (non-residential university), with about 351 000 students.9
For UP, the tuition cost and fees per student will be markedly higher than in the case of
Unisa because of on-campus class attendance with lecturers for all courses, limits on class
sizes, and other more customised learning assistance found in laboratories and practical
class sessions. However, Unisa offers distance education with hard-copy study materials
with no or limited lecturer contact. It accepts students from across South Africa and even
worldwide. Unisa can therefore offer a quality tertiary-education package to students far
afield at much lower tuition fees per student.
UP is good at what it does through its particular tuition model. Unisa, similarly, has been
exceptionally good for more than 145 years since 1873 at non-contact distance education,
and should not try to emulate residential universities in offering high-cost customised tuition
activities, since, inherently, its operational processes are not designed for these and cannot
be modified superficially for such a different tuition model.
A manufacturer versus a service provider
A motor-car manufacturer produces products that are physically tangible (the vehicle itself),
durable (not used up in one period) and can be kept in stock (when more vehicles are
manufactured than the number demanded immediately). There is no customer contact while
the vehicle is being manufactured and, unless there are already a few vehicles in stock, it
may take a while to deliver the vehicle to the customer. Motor-car manufacturers usually
have large production facilities and expensive equipment, which make this a capitalintensive industry. Because of the tangible nature of vehicles, it is possible to set, monitor
and ensure objective standards as far as quality is concerned.
A dentist renders a professional service. The service itself is intangible (it cannot be held
or touched) and can also not be kept in stock if it is not used immediately. The presence of
the user of the service (the patient) is necessary while the service is being rendered and the
response time is usually short. Provision of the service takes place in a small service facility
(a dental surgery), the service itself is labour intensive (the dentist is involved) and, because
the service is intangible, it is more difficult to set and maintain objective standards.
11.3The classification of process types for
manufacturers and service providers
Section 11.2 described an operations-management model that is applicable to both
manufacturers and service providers, yet the exact nature of the transformation
processes does differ. Such differences are important when the management of a
particular operation is considered because certain management techniques and
methods are suitable for application only in certain types of operation. Therefore, it is
useful to classify the process types that manufacturers and service providers use.
11.3.1The classification of process types for manufacturers
In manufacturing, the most common classification system classifies different
operations processes according to the volume of output (scope) and the variety of
products. Thus, a business that produces a product in large volumes with little variety
(for example, a manufacturer of bricks) will be placed in a different category from a
business that manufactures small volumes of a large variety of products (for example, a
clothing manufacturer). According to such a classification system (see Figure 11.4), five
main categories are identified. Each is discussed below with the aid of practical
examples:9
1.Project processes. Projects represent operational processes that are highly
individual and unique, but that are normally tackled on a large scale. It can take a
project team months or even years to complete such projects. Examples are
construction projects (such as the building or upgrading of an airport, bridge,
highway or shopping complex), the development programme for a new car or the
upgrading of an assembly line. Each project produces an output volume of one (the
volume is therefore low), but a wide variety of project types can be undertaken
(variety is therefore high). Two such large projects, which have recently been
completed (or are near completion) in South Africa, are the construction of the
Medupi (4 764MW) and Kusile (4 800MW) coal-fired power stations as well as the
Gautrain (a high-speed commuter railway line between Johannesburg, Midrand
and Pretoria).
2.Jobbing processes. Jobbing normally represents operational processes
conducted on a small scale with a low volume of output. The nature of the work is
the same throughout, but the specific requirements differ from one task to the next.
Examples are the process whereby a goldsmith manufactures jewellery (each piece
of jewellery is usually unique and takes the unique design preferences of the client
into consideration) and the printing of wedding invitations at a printing works
(two wedding invitations for two different couples are usually not exactly the same
in all respects). Thus, an important feature of these types of processes is that they
combine a wide variety of products with a small volume of products.
3.Batch processes (job lots). In batch production (lot production), a limited range
of products is manufactured by the business and production occurs in batches (or
lots). Batch production appears to be nearly the same as jobbing, but it does not
have the same degree of variety. Examples of batch production are the manufacture
of domestic appliances such as toasters, grills, irons and fridges by Defy, or the
manufacture of televisions, DVD players and sound equipment by Samsung.
Figure 11.4: The classification of manufacturers’ operational processes
Source: Adapted from Slack, N., Brandon-Jones, A. & Johnston, R. 2013. Operations management.
Harlow: Pearson Education Limited. Figure 4.3. p. 102. Reprinted by permission of Pearson Education
Limited.
4.Mass processes. Mass production is a well-known term for the production of
products in high volumes, but with relatively little variety. While there may be
some variants of the product itself (for example, the colour, engine size and
installation of optional equipment offered by motor-car manufacturers), the basic
process of production is the same, repetitive in nature, largely predictable and
easier to manage than both jobbing and batch processes.
5.Continuous processes. Continuous production is a step beyond mass production
because the volumes are even greater, but there is very little variety in the type of
product. Such processes provide the same product on a continuous basis without a
break, other than the occasional need for maintenance or plant upgrading.
Examples are a wheat mill (Sasko), an electricity generation utility (Eskom), a
cement manufacturer (PPC cement), a petrochemical refinery (Sasol) and a paper
manufacturer (Sappi).
11.3.2The classification of process types for service providers
The same classification criteria used for manufacturers can be used for service
providers (one based on output volume and output variety). According to such a
classification system (see Figure 11.5), three main categories can be identified. Each is
discussed below with the aid of practical examples:11
Figure 11.5: The classification of service providers’ operational processes
Source: Adapted from Slack, N., Brandon-Jones, A. & Johnston, R. 2013. Operations management.
Harlow: Pearson Education Limited. Figure 4.3, p. 102. Reprinted by permission of Pearson Education
Limited.
1.Professional services. Professional services represent operational processes
provided on a high client-contact basis, where the client is usually present within
the service process for a considerable period of time. Contact often occurs on a oneto-one basis. The nature of the service provided takes the specific needs of clients
into consideration and is therefore more people oriented than equipment oriented.
Because of the client-focused nature of these services, the extent (volume) of
presentation is low, while the variety of services that can be provided is high.
Examples of professional services (referred to as such because of the formal
academic qualifications and registration that such professional practitioners need
to obtain) include the services of dentists, doctors, attorneys, auditors and
management consultants.
2.Service shops. Service shops represent operational processes where the
characteristics of service provision fall between those of professional services and
those of mass services. There is a fair amount of client contact and services are
standardised to a certain extent, but the services are also adapted to accommodate
the unique needs of clients (there is more variety than there is in mass services).
The number of clients served is also greater (the volume processed is usually more
than with professional services). Examples of service shops are banks, hotels and
retail stores.
3.Mass services. Mass services represent operational processes where many client
transactions take place with limited client contact and in which the nature of the
services provided is largely standardised (variety is therefore low). These services
are usually equipment oriented and are provided on a larger scale (volume is
therefore high). Examples of mass services include post and telecommunication
services, air- and rail-transport services, and television-broadcast services.
11.4Operations design
11.4.1The nature of operations design
The design of a product – for example, a motor car – entails far more than merely
determining its physical appearance in terms of shape, colour and finish. It also includes
the design of the operational processes for manufacturing the different components of
the motor car, such as the body assembly, paintwork and composition of the chassis and
engine. Similarly, in the design of a service – for example, a 24-hour security monitoring
and reaction service – the processes (or systems) should be designed to execute the
particular service as specified. This may involve an alarm system, a control room,
security personnel and reaction vehicles.
Thus it is clear that operations design entails two interdependent aspects:
1.The design of products and services (also referred to as product design)
2.The design of operations product or service processes to manufacture or provide
these products or services (also referred to as process design).
The primary aim of operations design is to provide products and/or services and
processes that satisfy the needs of customers/clients in the best possible way.
Figure 11.6 provides a broad framework of the different activities involved in
operations design.
Design, as an operations activity, helps to achieve the operations-management
objectives with regard to quality, cost, lead time, adaptability, variability and service.
The designers of a product such as a fridge, for example, will endeavour to design an
aesthetically acceptable product that will satisfy customers’ expectations regarding
functionality and reliability, as well as be quick and easy to manufacture. The design
should also be such that errors in the manufacturing process are kept to a minimum so
that manufacturing costs can be kept at a reasonable level.
Designers of services (for example, a cellphone or Internet service) are also expected
to construct the service in such a way that clients’ expectations are met, and the service
can be rendered affordably and within the operational ability of the business. Most, if
not all, products and services encountered in the market today first have their origin as
a vague idea or concept put forward as a suitable solution to a perceived need of a
customer/client. The idea or concept is refined over a period of time and, in the process,
more and more detailed information is attached to the idea or concept. Ultimately, there
is sufficient information to put together a specification for the product or service, and
the process for its manufacture or provision.
Figure 11.6: The nature of operations design
Source: Slack, N., Chambers, S. & Johnston, R. 2004. Operations management. Fourth edition. Essex:
Pearson, Figure 4.1, p. 95. Reprinted by permission of Pearson Business.
11.4.2The design of products and services
Although the operations manager is usually not solely and directly responsible for the
design of a product or service, he or she is indirectly responsible for providing the
information and advice on which the ultimate success of the development,
manufacturing or delivery of the product or service depends.
11.4.2.1The competitive advantage of good design
The design of a product or service begins and ends with the customer/client. Initially,
products and services are designed with a view to satisfying the needs of the
customer/client in the best possible way. If products or services are well designed,
produced and provided so that the expectations of customers/clients are realised or
even exceeded, the business’s competitive position will be reinforced through the
increased sales of these products and services. For example, the design and production
of the well-known Venter trailer is a good example of how a competitive advantage can
be gained in the market. Other manufacturers have since entered the market with
similar products, but Venter is still the market leader.
11.4.2.2The components of products and services
All products and services consist of three interdependent components:12 a concept, a
package and a process. The concept (or idea) is the set of expected benefits that the
customer/client purchases when purchasing a product or service in response to his or
her needs. Because customers/clients are not just buying the product or service, but
also this set of expected benefits, the product or service should meet all their
expectations. For example, when someone buys a new car, not only the car itself is
bought, but also all the expected benefits that go with it, such as safety, reliability,
outstanding road-holding ability and, possibly, a high value at resale. The same applies
when a service – for example, medical treatment at a hospital – is purchased. The
patient expects a set of benefits such as good medical care, the timeous receipt of
prescribed medication, and a secure and peaceful environment so that he or she can
recover from the illness.
The set of expected benefits that a customer has is referred to as the ‘product
concept’, while the set of expected benefits that the client has is referred to as the
‘service concept’. When the product or service is designed, the operations manager
should understand exactly what the customer/client expects from the business. This
knowledge and insight is of vital importance to ensure that the transformation process
provides the ‘right’ product or service concept.
Concepts involve a package of products and services. The concept of a product
usually refers to a tangible physical object such as a car, dishwasher or article of
clothing, while the concept of a service indicates an intangible object such as a visit to a
theatre, a hairdressing salon or a nightclub. However, as mentioned above, it is often
difficult to make a clear distinction between these two concepts. Take, for example, a
new car. The physical vehicle is clearly a tangible object, but the other benefits – such as
the guarantee and the regular repairs at scheduled times – are an intangible service. A
meal in a restaurant comprises physical products such as food and drink, but also
service in that the food is prepared and served, and even the atmosphere in the
restaurant plays a role. Thus, regardless of whether it is a product or service that has
been designed, the package comprises a combination or ‘bundle’ of products and
services. It is this package that the customer/client in fact purchases.
Two further aspects should be kept in mind in the composition of a service package:
1.Services cannot be inventoried. For example, if an appointment or flight ticket is
not used, then the opportunity ‘lapses’ and is wasted.
2.Services usually involve direct interaction between the customer/client and the
process.13 They can involve high contact (seeing a psychotherapist) or low contact
(posting a letter).
A process is necessary to create the package of products and services. The design of the
products or services takes place in conjunction with the design of the processes
required to manufacture or provide them. (The stages of the design of products and
services are discussed in Section 11.4.2.3, and the design of the processes is discussed in
Section 11.4.3.)
11.4.2.3The stages in the design of products and services
The design of a product or service ultimately results in a full detailed specification of
the product or service. To compile this specification, detailed information must be
obtained about the concept (the form, function, aim and benefits of the design), the
package (the composition of products and services required to support the concept) and
the process of creating the package (which determines the way in which the individual
products and services of the package will be manufactured or provided).
To obtain this full detailed specification, it is necessary to first follow certain
consecutive steps. Although not all businesses necessarily follow the same steps, the
typical sequence of steps is as follows:
•Concept generation. The first step in designing a product or service starts when
different ideas for new product concepts or service concepts are generated. New
ideas for products or services can come from within the business itself (for example,
the ideas of personnel or those from formal research and development
programmes) or from outside the business (for example, the ideas of
customers/clients or competitors).
•The screening process. Not all concepts that are generated will necessarily
develop into new products and services. Concepts are evaluated by means of a
screening process based on certain design criteria, such as feasibility (how difficult
is it and what investment is needed?), acceptability (how worthwhile is it and which
return is possible?) and vulnerability (what could go wrong and what risks are
there?). Each of the stages that follows progressively refines the original concept up
to the point where there is sufficient information and clarity for it to be turned into
an actual product or service with an operational process to produce or deliver it.
Such progressive reduction of the multitude of design options for a new product and
service occurs through a process of elimination that is referred to as the ‘design
funnel’.14 Overall, the purpose is to determine whether the new concept will make a
significant contribution to the product or service range of the business. Several
functional management areas – such as marketing, operations and finance – are
involved in the screening process of new concepts, and each may use different
criteria in this process. The operations manager is responsible for operationsfocused screening to determine whether the business has both the ability (people,
skills and technology) and the capacity to produce or provide the concepts.
•Preliminary design. Once the ideas and the concepts generated by the particular
functional-management areas in the business are reduced to one or two potentially
acceptable product or service concepts, the next step is the preliminary design of the
product or service. The preliminary design is the first attempt to specify the
composition of the components of the product or service to be included in the
package and to identify the processes that will be necessary to produce or provide
the product or service package.
•Evaluation and improvement. The aim of this step is to evaluate the preliminary
design with a view to improving it, and making the process of manufacture and
provision less expensive and easier. Various techniques and methods can be used as
aids in this step.
•Prototype and final design. The last step in the design of products or services is
the development of a prototype of the product, or a simulation of the service, in
order to test it in the market. If the prototype, which is based on the improved
preliminary design, is favourably received in the market, the final design and
specifications of the product or service can be compiled.
11.4.3The design of operations processes
The design of operations processes to manufacture products or provide services is just
as important as the design of the products or services themselves. Without both
competent product design and competent process design, it is impossible to develop,
manufacture or provide a successful product or service.
11.4.3.1The design of supply networks
No operations process exists in isolation; it is always part of a greater,
integrated supply network.15 Besides the specific operations process itself, the supply
network also includes the suppliers of materials or services, as well as intermediaries
and final customers/clients.
In the design of a particular operations process, it is important for the entire
supply network to be taken into consideration. This enables the operations manager to
determine precisely what the inputs for the specific operations process are and the
customer/client needs that have to be satisfied.
Such a study also helps the business to determine its competitive position in the
supply network, identify significant interfaces in the supply network and reflect on its
long-term involvement in the supply network.
11.4.3.2The layout and flow of manufacturing and service-provision facilities
The layout of the operations facility determines the physical arrangement of the
resources (such as machines, equipment and personnel) used in a particular
transformation process. The layout of a manufacturing or service-provision facility is
usually the first characteristic of an operational process to be observed because it
determines the physical form and appearance of the facility. At the same time, the layout
determines the way in which resources such as materials, information and
customers/clients flow through the transformation process. Both the layout and flow of
an operations facility are of particular importance since small changes in the placement
of machines and the flow of material and people can greatly influence the operational
process in terms of cost and efficiency.
The layout of a manufacturing or service-provision facility entails three steps:
selecting the process type, selecting the basic layout type and making a detailed design
of the layout.
The first step is selecting the process type. The different process types for both
manufacturers and service providers were discussed in Section 11.3. The process types
for manufacturers are project, jobbing, batch, mass and continuous processes. For
service providers, they are professional services, mass services and service shops.
The second step is selecting the basic layout type. Four basic layout types,16 that
depict the general form and arrangement of operations facilities, can be identified (see
the box on page 334). The four basic layout types are as follows:
1.The fixed-position layout. In this layout, the product cannot be shifted on
account of its size, shape or location. The resources for transformation (equipment,
machinery and people) are taken to the receiver of the processing, which is static,
for example, a construction site or a shipyard.
2.The process layout (flexible-flow layout). In this layout, similar processes
(operations) are grouped together into sections. For example, if a business
manufactures not only basic office chairs, but also tables and desks, these can be
grouped together for the tasks (sawing, planing, turning and attaching).
3.The product layout (line-flow layout). In this layout, the different processes
(operations) required to manufacture a product or provide a service are arranged
in consecutive order. Thus the layout is adapted to the product, as in the case of an
assembly line for motor vehicles or the service counters in a self-service cafeteria.
4.The cellular layout (hybrid layout). In this layout, specific processes are placed
in a cell, which is then arranged according to either a process or a product layout. A
good example here is a department store selling men’s, ladies’ and children’s
clothing. The men’s department functions as an independent cell with its own
layout, and the same applies to the ladies’ and children’s departments.
However, the selection of a basic layout type merely provides an indication of the
broad layout of the operations facility. It does not determine the precise placement of
the various machines and equipment. The final step in the layout of a manufacturing or
service facility therefore entails making a detailed design of the layout.
11.4.3.3The application of process technology
All operations processes use some or other form of process technology. Process
technology refers to the machines, equipment and apparatus used in the transformation
process to transform materials, information and clients so that products can be
manufactured or services provided. Process technology may range from relatively
simple processes (for example, a basic extraction process such as using a machine to dig
a hole for a new pipeline) to highly complex and sophisticated systems (such as
automated manufacturing, which uses robots). Automated manufacturing represents
the future of ‘overall better’ manufacturing and service provision. This will involve less
human involvement and greater use of robotics to develop the ‘ultimate machine’ that
will be able to deliver extraordinarily high levels of error-free products and services
(quality), nearly instantaneously (speed), whenever required (dependability),
inexpensively (cost) and with much-reduced waste and greater efficiency.17
The operations manager has to be involved continuously in the management of all
facets of process technology. To perform this task effectively, he or she needs to:
•foresee how technology can improve a specific operational process;
•decide which technology or technologies to use;
•integrate the new technology with existing operations activities;
•continually monitor the performance of the technology; and
•upgrade or replace the technology when necessary.
Although the operations manager is not necessarily a specialist in each technological
field, he or she should still have an understanding of what a particular technology
essentially entails and how the technology performs the particular function. He or she
should also be able to identify the advantages and limitations of a particular technology
in the operational process.
For example, a cotton farmer will have to decide whether to mechanise the
harvesting process by using a cotton harvester or whether to continue using manual
labour. The advantages of mechanising the operational process would be likely to
include the speed at which the cotton is harvested, the better quality of the collected
cotton and cost savings over time. Limitations would possibly include greater capital
expense and greater process complexity.
11.4.3.4Job design and work organisation
Operations management focuses not only on the technologies, systems, procedures and
facilities in a business (the so-called non-human component), but also on people’s
involvement in the operations activity itself. The way in which human resources are
managed in a business has a fundamental effect on the effectiveness of the operations
function. Since most people who are appointed in a business are usually active in the
operations function, this places a huge responsibility on the shoulders of the operations
manager as far as leadership in the business and development of employees are
concerned. Job design is of vital importance in operations management because it
determines how workers perform their various daily tasks. Work study is a scientific
approach that can be used to great effect in job design and work organisation. It refers
to the application of different techniques to study all the factors influencing the people
in the work environment systematically in order to improve the execution of tasks in
terms of efficiency and effectiveness. Two work-study techniques often encountered in
the literature are method study and work measurement.18 Method study entails the
systematic recording and critical investigation of present and proposed work methods,
with a view to the development and application of easier and more effective methods in
an effort to reduce costs. Work measurement entails the application of techniques
designed to determine how long it takes a trained and qualified worker to do a specific
job at a fixed level of performance. The components of work study are illustrated
diagrammatically in Figure 11.7.
Applying the concept Four basic layout types
Fixed-position layout
Process layout or flexible-flow layout
Product layout or line-flow layout
Cellular layout or hybrid layout
Figure 11.7: Components of work study
Source: Slack, N., Chambers, S. & Johnston, R. 2007. Operations management. Fifth edition. Essex:
Pearson, p. 261, Figure 9.5. Reprinted by permission of Pearson Education, Inc., New York, New York.
11.5Operations planning and control
11.5.1The nature of operations planning and control
In Section 11.4, design was examined as one of the activities of operations management.
This design activity determines the physical form and structure of the operations
process, and it has to be activated within the limits imposed by the design of the
operations process. This is done by means of operations planning and control.
Operations planning and control focuses on all the activities required to put the
operations process into action efficiently on a continuous basis so that products can be
manufactured or services can be provided to meet the needs of customers/clients.
In contrast to operations design, which may be regarded as a ‘passive’ activity
primarily aimed at determining the broad limits of the operational process, operations
planning and control is an activating activity that starts the operational process
‘physically’ so that products can be manufactured or services can be rendered. In the
activation of the operational process, the operations manager is responsible for
ensuring that the operations-management performance objectives of quality, cost, lead
time, adaptability, variability and service (see Section 11.2.1) are pursued and achieved.
Critical thinking
Some true South African innovations
Which products and/or services were originally developed in South Africa?
New products and services are important for the emergence of new businesses.
Consider, for example, the development of cellphone technology, also known as mobiles.
Some new businesses (for example, Nokia) came into being as manufacturers of
cellphones, although other existing businesses (for example, Sony, Motorola and Samsung)
merely expanded their product ranges. In South Africa, no service providers existed at the
time when cellphones first made their appearance, but some new businesses were
subsequently started (for example, Vodacom, MTN and later Cell C).
Not only can new products and services be seen as catalysts for the emergence of new
businesses, but they can also be considered as vital for the continued success of other
businesses. Some countries (such as the United States and Germany) are known for
regularly offering new product ideas or new technologies and innovations, while others (such
as Japan and China) are said to prefer, in the main, to copy others or apply technology
already discovered. Some innovative new products and services are accredited to South
Africans. The following ideas for products or services received recognition from the Cape
Town Science Centre as the top ten inventions or discoveries by South Africans:
1.Dolosse. These concrete blocks, shaped like interlocking bones, are used on
breakwaters to withstand wave action. First used in East London and later around the
world, they were invented by harbour engineer Eric Merrifield and his team.
2.Kreepy Krauly. This automatic pool-cleaning device was originally a South African
invention, but it is now owned by an American company. Other pool-cleaning devices
that originated from South Africa include brand names such as Aquanaut, Baracuda
and Pool Ranger.
3.Tellurometer. This pioneering distance-measuring device was invented by Trevor
Wadley.
4.Pratley Putty. This is a two-part clay-like mixture that bonds into a very hard and
strong compound. It is the only South African invention to have gone to the moon. It
was invented by K.G.M. Pratley.
5.Lunar stick. This is the oldest mathematical artefact in the world (35 000 years old),
and was found in a cave in northern Kwazulu-Natal.
6.Scheffel bogey. This revolutionary train-carriage wheel assembly is used in Austria
and South Africa.
7.Disa telephone. This was the first push-button telephone in the world. It was invented
by Telkom technicians.
8.Appletiser and Grapetiser. These sparkling drinks use a pure fruit-juice recipe.
9.Computicket. This was the first computerised ticket-sales system in the world.
10.Vibol fuel-saving exhaust system. This is used all over the world.
Source: Editors Inc. 2006. South Africa at a glance 2005–2006. Greenside: Editors Inc., pp. 268–269.
Reprinted by permission of Editors Inc.
Operations planning and control activities broadly endeavour to reconcile two
entities. On the supply side, there are the products manufactured or services provided
in the operational process. On the demand side, there are the specific needs of actual
and potential customers/clients for products or services. Planning and control activities
are aimed at reconciling the provision ability of the operations facility with the demand
for specific products or services. Figure 11.8 illustrates the nature of operations
planning and control in this process of reconciliation.
Figure 11.8: The nature of operations planning and control
Source: Adapted from Slack, N., Chambers, S. & Johnston, R. 2004. Operations management. Fourth
edition. Essex: Pearson, Figure 10.1, p. 323. Reprinted by permission of Pearson Business.
Reconciling the supply of products or services with the demand for them by means of
planning and control activities occurs in terms of three dimensions:
1.Volume (the quantity of products or services)
2.Timing (when the products or services have to be manufactured or provided)
3.Quality (whether products or services consistently conform to
customers’/clients’ expectations).
To reconcile the volume and timing dimensions with each other, three different but
integrated activities are performed: the loading of tasks, the sequencing of tasks and the
scheduling of tasks.19
The loading of tasks refers to the volume or quantity of work allocated to a
particular work centre. The available capacity of the operations process needs to be
taken into consideration in the loading of work centres. For example, a medical
practitioner will examine only one patient at a time in his or her consulting rooms,
while the other patients wait in the waiting room.
The sequencing of tasks refers to the sequence in which the tasks are performed.
The sequence in which tasks are performed can be determined beforehand by the use of
certain priority rules, such as dealing with the job with the earliest deadline first, or
following a first-in, first-out approach. A commercial bank, for example, will serve the
client who is at the front of the queue first.
The scheduling of tasks refers to the use of a detailed roster that indicates when a
specific task should start and when it should be completed. Gantt charts are especially
popular for planning and scheduling projects, and also give an indication of which tasks
are late and which tasks are at a more advanced stage than anticipated.
After having viewed operations planning and control from a general perspective, the
focus moves to specific operations activities: capacity, inventory and supply chain, and
quality.
11.5.2Capacity planning and control
The focus of capacity planning and control is on the provision of the manufacturing or
service capacity of a particular operations process. When a suitable balance is found
between the available capacity and the expected demand, it is possible that the business
will have both satisfied customers/clients and acceptable profits. However, if the
balance is ‘wrong’ – that is, too much capacity with too little demand, or too little
capacity with too much demand – the business is faced with a potentially disastrous
situation. Businesses in this position may sit either with costly surplus capacity or with
possible lost sales opportunities. Because of the far-reaching impact that capacity
decisions may have on the business as a whole, capacity planning and control are of
vital importance in operations management.
11.5.2.1Defining capacity
The term ‘capacity’, as it is used in everyday language, usually refers to the fixed
volume of, for example, a fuel tank (50 litres) or the space, for example, in a parking
garage (bays for 500 vehicles). However, from an operations point of view, these scale
or size dimensions are not sufficient, since capacity also has a time dimension (as
illustrated in the box below).
Applying the concept Calculation of the total capacity of a parking
garage
If there are 500 parking bays in a parking garage at a supermarket, 500 vehicles can park
there at a given time. However, this is not the total capacity. If the parking garage and
supermarket are open for ten hours a day and customers take, on average, an hour to do
their shopping, the total capacity of the parking garage is actually 5 000 motor vehicles
(number of parking bays × number of hours for which the parking garage is open average
time for which a car is parked).
In an operations process, capacity is defined as ‘the maximum level of value-added
activity over a period of time that the process can achieve under normal operating
circumstances’.20
11.5.2.2The nature of capacity planning and control
While long-term capacity is already determined during the design of the operations
process in the medium and short terms, there is the possibility of adapting or varying
the capacity of the operations process in accordance with changes in the demand for
particular products or services. Thus, particular machinery or equipment can be used
for longer periods each day, or workers can be asked to work overtime during peak
periods.
Operations managers generally have to work with a demand forecast that is by no
means completely accurate and, moreover, is sometimes subject to regular
fluctuation. Quantitative data on the expected demand and the required capacity to
satisfy this expected demand must be obtained by applying the three steps described
below.
Step 1: The total demand and required capacity must be determined. As a rule, the
marketing function is responsible for determining the total demand by means of
demand forecasting. Since this forecasting is an important input in determining the
required capacity, the operations manager must at least have some knowledge of the
basis for and rationale behind the demand forecasts. The way in which the required
capacity will be determined depends on the nature of the products manufactured or
services provided. With standardised products and services (where there is high
volume with little variety), capacity will be measured in terms of output (for example,
the number of television sets to be produced per week or the number of flights to be
provided to Cape Town each day). In the case of less standardised products and services
(where there is lower volume and more variety), capacity will instead be measured in
terms of input. (Examples here are the number of working hours per week of a
goldsmith making items of jewellery or the number of beds available in a hospital per
day.)
Step 2: Alternative capacity plans must be identified. The operations manager is
expected to have alternative capacity plans in order to accommodate possible changes
in demand. Three options are available:21
1.A level-capacity plan in which the capacity levels are kept constant and demand
fluctuations are ignored.
2.A chase-demand plan in which capacity levels are adjusted according to
fluctuations in demand.
3.A demand-management plan in which demand is adjusted to tie in with available
capacity.
In practice, operations managers usually use a mixture of the three alternative capacity
plans, although one of them may be more dominant than the others.
Step 3: The most suitable approach to capacity planning and control must be
chosen. Here, an endeavour is made to choose an approach that will best reflect the
business’s specific circumstances. For example, a fruit-packing plant will employ more
temporary workers during the harvesting season to help with the packing of the fruit.
Applying the concept The moving-average demand-forecasting
technique
Table 11.2 shows how the moving-average demand-forecasting technique is applied to
forecast the demand for washing machines for May 2019.
Table 11.2: Three-month moving-average demand forecast for washing machines
Based on a three-month moving average, the demand forecast for May 2019 is therefore
550 units of washing machines.
However, the disadvantage of this approach is that if the demand continues to grow, the
predicted demand is always going to be too low. In this example, the actual demand may be
610 but, according to the moving average, only 550 washing machines will be manufactured
and there will, therefore, be a shortage.
11.5.2.3Techniques and methods used during capacity planning and control
Various techniques and methods can be applied during capacity planning and control to
execute this activity better. Two of these methods are the moving-average demandforecasting technique and the cumulative representations of demand and capacity.
(Other techniques and methods, such as exponential levelling, demand-forecasting
accuracy measures and the application of the queuing theory, are regarded as advanced
topics and are therefore not included in this text.)
Applying the concept Cumulative representations of demand and
capacity
This method can be applied to evaluate a capacity plan for a coal mine. It would appear from
the example that the production of coal from a South African mine during the months
January to April was greater than the demand for it, and that there was ‘surplus’ production
during this period. From April to July (autumn and winter), the demand for coal was greater
than production – hence there was a period of ‘underproduction’.
The moving-average demand-forecasting technique is based on the availability
of actual demand data over preceding periods. This technique can be used to forecast
the demand for the following period and is especially suitable for applying to the
demand for products where the demand pattern is stable over the short term.
Cumulative representations of demand and capacity is a method that can be
used to evaluate the effect of different capacity plans graphically.
11.5.3Inventory and supply-chain planning and control
These days, inventory and supply-chain planning and control are regarded as activities
executed by a separate functional management area called purchasing management.
However, since the inventory of materials and the purchase thereof have significant
implications for the smooth functioning of the transformation process, for which the
operations manager is mainly responsible, inventory is usually defined (from an
operations-management perspective) as all stored resources (material, information and
clients) required for the smooth functioning of the operations process. The operations
manager should therefore liaise closely with the purchasing manager in order to
manage inventory levels optimally.
Inventory and purchasing planning and control are discussed in Chapter 15.
11.5.4Quality planning and control
Nowadays, quality is regarded as being so important in many businesses that
responsibility for it is not confined to the operations-management function only. The
basic premise of concepts such as total quality management (TQM) is that quality
products and services can be manufactured only if the entire business contributes to the
achievement of such an objective.
Quality is one of the main methods of adding value to products and services, and
thereby obtaining a long-term competitive advantage. Better quality influences both
factors that contribute to the business’s profitability: income and cost. Income can be
increased by more sales and greater market share, while costs can be reduced by lower
repair and inspection costs, and reduced wastage, inventory and processing time.
11.5.4.1Defining quality
Different definitions of quality are often advanced. Each of them stems from a different
approach to or view of quality. Thus, ‘quality’ has been defined as ‘the absolute best’,
‘something flawless’, ‘suitable for the purpose for which it was designed’, ‘meeting a set
of measurable characteristics’ or ‘good value for money’. From an operationsmanagement perspective, quality is defined as ‘consistent conformance to
customers’/clients’ expectations’.22
Operations management therefore defines quality in terms of what a
customer/client expects of a particular product or service, while the customer/client
sees quality in terms of his or her own perception of the product or service. This
difference between expected quality (by operations management) and perceived quality
(by customers/clients) is known as the quality gap. Operations management, in
conjunction with the other functional management areas, should endeavour to
eliminate any quality gaps.
11.5.4.2The nature of quality planning and control
The aim of quality planning and control is to ensure that the products or services that
are manufactured or provided conform to or satisfy design specifications. The
discussion of the design of products and services stated that the ultimate goal of this
activity is to establish specifications for products or services that will satisfy the needs
of customers/clients. Hence, what exists here is a customer/client–marketing–design–
operations cycle. This design cycle (see Figure 11.9) can be further extended to include
quality planning and control activities to ensure that products or services do in fact
meet design specifications.
Figure 11.9: Extending the product/service design cycle for quality planning and control
Source: Slack, N., Chambers, S. & Johnston, R. 2004. Operations management. Fourth edition. Essex:
Pearson, Figure 17.6, p. 601. Reprinted by permission of Pearson Business.
11.5.4.3The steps in quality planning and control
Quality planning and control can be divided into six steps.
Step 1: Defining the quality characteristics of the product or service. The design
specifications for products or services are determined in the design activity. The design
specifications as such are not monitored by quality planning and control, but rather by
the operations process that manufactures the products or provides the services. This is
to ensure that the specifications are met. For the purposes of quality planning and
control, it is necessary to define certain quality characteristics that relate directly to the
design specifications for products or services. Quality characteristics that are often
used include:
•functionality (performance ability);
•appearance (aesthetic attractiveness);
•reliability (continuous performance capability);
•durability (total life expectancy);
•serviceability (reparability); and
•contact (convenience of interaction).
Thus, for example, a customer will expect an expensive Blu-ray player to record and
replay TV programmes clearly, to be aesthetically pleasing, and to have a long and
reliable lifespan and problem-free maintenance and repair.
Step 2: Measuring the quality characteristics of the product or service. For each
individual product or service, the quality characteristics should be defined in such a way
that they can be measured and controlled. The different quality characteristics should
thus be further broken down to make such measurement possible. For example, if the
quality characteristic of functionality is measured in relation to a motor car, it can be
broken down into the measurable dimensions of speed, acceleration, fuel consumption
and road-holding ability. However, it is sometimes difficult to measure specific quality
characteristics, such as the friendliness and efficiency of service provided by sales staff
in a store. Here, an effort will instead be made to gauge shoppers’ perceptions of the
service provided by staff, in order to measure this. Indeed, customers shopping at
Woolworths will often receive, by email, a questionnaire rating service in a store they
have recently shopped in (Woolworths card holders).
Critical thinking
Good-quality products and/or services
What constitutes a good-quality product or service?
Much attention is paid in the business world to the concept of good-quality products and
services. However, some businesses view quality as important, but not necessarily critical
for business success, while other businesses stake their reputations on quality and are
known for providing their customers/clients with the best possible quality products and
services. Think of Woolworths foods and Avis car rentals in this regard.
This leads to the question: Is quality really so important? To help answer this question, it
is worth asking another question: Who wants a product that is broken or performs below
expectations, or poor service delivery? Undoubtedly, the answer to this is: No one.
If good-quality products and services are considered important for customers and clients
alike, it logically follows that businesses that want to be successful over the long term should
pay attention to these requirements. Thus better-quality products and services have definite
advantages for a business.
Better-quality products and services improve the competitive position of the business by:
•enabling it to sell its products or services at a premium or a higher price in the
marketplace; and
•creating the possibility of increasing the business’s market share.
Both of these aspects lead to increased revenue for the business through market-route
benefits and, in the end, increased profitability.
Better-quality products or services increase the defect-free output of the business by:
•lowering the costs of operations (through reductions in waste, rework, scrap and so on);
and
•increasing the level of overall productivity.
Both of these aspects lead to increased revenue for the business through cost-route benefits
and once again, in the end, increased profitability.
Clearly, better-quality products and services have the possibility of not only increasing
the revenue of the business through the market and cost routes, but, more importantly, they
have the possibility of improving its long-term profitability.
To conclude, good- or better-quality products and services are important for
customers/clients, and businesses can only profit from improving their total quality initiatives.
Source: Based on an illustration of the benefits of TQM as contained in Schonberger, R.J. & Knod, E.M.
(Jr). 1991. Operations management: Improving customer service. Fourth edition. Homewood, Illinois: Irwin,
p. 139. Reproduced with permission of The McGraw-Hill Companies.
Step 3: Setting standards for each quality characteristic of the product or service.
Once the operations manager has ascertained which quality characteristics are going to
be measured and how, the next step is to set specific quality standards against which
the achievement of, and conformance with, the quality characteristic can be measured.
Although most businesses strive for ‘absolutely perfect’ standards (for example, ‘the
quest for zero defect’), it is generally too expensive or unrealistic to expect a motor
vehicle, for example, to last forever. Instead, realistic, achievable standards are set – for
example, that the motor vehicle will have an effective lifespan of ten years.
Step 4: Controlling quality against the set standards. Once realistic standards for
measuring the output of the operations process have been laid down, the next step is to
determine whether the product or service does, in fact, measure up to them. Three
questions in particular are of importance to the operations manager here:
1.Where in the operations process should one check to see if the standards have
been satisfied? There are three possible positions: at the beginning of the process
(preventive control), during the process (in-time control) or after the process
(reactive control).
2.Should each individual product or service provided be checked to determine
whether the standards have been met? It is not always possible or desirable to
inspect all products or services fully, and managers could instead use samples to
determine whether the products or services do in fact meet the standards.
3.How should the inspection be conducted? In practice, most businesses use
sampling to ascertain whether their products or services measure up to standards.
Two methods used here are statistical process control (SPC), whereby the
inspection of a quality characteristic takes place during the process of
manufacturing or service rendering, and acceptance sampling (AS), whereby
inspection occurs after the process of manufacture or service rendering.
Step 5: Identifying and rectifying the causes of poor quality. An important goal in
quality planning and control is to identify the presence of poor quality and the reasons
for it, and then rectify the poor quality.
Step 6: Continuously improving quality. As was mentioned earlier, quality is one of
the most important ways of adding value to products or services in order to obtain a
long-term competitive advantage – hence the importance of improving quality on a
continuous basis. (This aspect will be discussed further in Section 11.6.)
11.6Operations improvement
11.6.1The nature of operations improvement
Sections 11.4 and 11.5 examined the design of the operational process, and the planning
and control of the operational process. Yet, even if both of these activities are
successfully executed, the task of the operations manager is still not complete. Any
operational process, regardless of how well it is initially designed or how well it is
planned and controlled, can certainly be improved. Nowadays, the improvement of the
operational process of a business is seen as a further (and probably even more
important) activity of the operations manager.
Figure 11.10 provides a broad framework of the various activities that are pertinent
in operations improvement.
Figure 11.10: The nature of operations improvement
Source: Adapted from Slack, N., Chambers, S. & Johnston, R. 2004. Operations management. Fourth
edition. Essex: Pearson, p. 639. Reprinted by permission of Pearson Business.
Before any operations process can be improved, it is necessary to determine what its
current performance is. Performance measurement is therefore a prerequisite for any
improvement. In measuring performance, managers ascertain the extent to which the
present operations process satisfies the formulated operations-management objectives
as far as quality, service, adaptability, lead time, cost and variability are concerned.
11.6.1.1Different types of performance standards
Once managers have determined, by means of performance measurement, the extent to
which the present operations process satisfies the set operations-management
objectives, the overall performance of the process should be evaluated. This is done by
comparing the present performance level with certain standards. Four kinds
of performance standards are generally used:
1.Historical performance standards (by which present performance is compared
with the particular business’s own performance in previous years).
2.Target performance standards (by which present performance is compared
with predetermined standards, which indicate an acceptable or reasonable level of
performance).
3.Competitors’ performance standards (by which present performance is
compared with that of one or more similar competitors – as in the case of
benchmarking, where businesses evaluate their own operations function by
comparing their product or service package with that of their competitors).
4.Absolute performance standards (by which current performance is compared
with the theoretical maximum achievable performance standards).
11.6.1.2Priorities for improvement
Once the performance of the present operations process has been measured and
compared with one or more of the performance standards, the areas that need
improvement should be clear. However, not all areas earmarked for improvement are
equally important. Priorities for improvement therefore need to be determined. This
is done by taking into consideration the needs and preferences of customers/clients,
and the performance and activities of competitors.
The needs of customers/clients provide an indication of those performance areas
of particular importance to them. Operations-management objectives should reflect the
preferences of clients/customers, such as high quality or low costs. The internal
operation or functioning of a specific operations process should be focused on achieving
these preferences.
However, the competitors’ performance and activities play a different role in
establishing priorities for improvement. The performance of the business’s operations
process in relation to the performance of its so-called competitors enables the business
to identify its operations-based advantages.
11.6.1.3Approaches to improvement
Once the priority areas for improvement have been determined, a specific approach or
strategy for improvement must be decided upon. Two divergent approaches to
improvement can be followed: breakthrough improvement or continuous
improvement.
In breakthrough improvement, dramatic and large-scale changes occur in the
functioning of an operations process, but not very regularly. The major changes in
respect of products or services, process technology, or methods of work will, it is hoped,
lead to improved performance. Business process re-engineering (BPR) is an example of
a radical breakthrough-improvement approach that is encountered in practice today.
In continuous improvement, also known as Kaizen improvement, more regular,
but smaller, incremental changes take place in the functioning of the operations process.
The aim is to improve the process on a continuous basis. The plan–do–check–act
(PDCA) cycle is an example of a continuous improvement approach that is used in
practice. South African motor manufacturers make frequent use of this approach. Their
staff are, accordingly, strongly encouraged to suggest continuous small changes in the
work process. A further continuous improvement approach is the adoption of lean
management principles. This focusses on smoothing the work flow through all of the
processes, doing simple things well and better each time, meeting customer needs and
eliminating all forms of waste in each step of the process.23 Seven types of waste that the
Toyota production system (TPS) seeks to eliminate under its lean philosophy are:24
•over-production (producing more than what is immediately required);
•long waiting times (low equipment and labour efficiency);
•transport (moving items around the operation back and forth with double or triple
handling);
•process (poor component design of the process and poor maintenance of
equipment);
•inventory (the target should be that all inventory is eliminated);
•motion (simplification in the process without unnecessary movement of items);
and
•defectives (the total costs of quality defectives must be taken into consideration).
11.6.2Failure prevention and recovery
Regardless of how well a particular operations process is designed, and thereafter put
into operation by means of planning and control, there remains the chance of failures or
breakdowns occurring. No operations process is always perfect. However, acceptance of
the fact that failures will occur does not mean that such events should be ignored. Some
failures may have less serious consequences than others, while other failures may be
critical for the functioning of the operations process itself. Hence, a continuous
endeavour should be made to limit the occurrence of failures. Operations managers
have a particular responsibility to improve the reliability of the operations processes
that manufacture products or provide services on a continuous basis.
11.6.2.1Types of failures
Failures in operations processes may occur for one or more of the following reasons:
•Design failures (these occur when the design of the process is found to be wrong
or inadequate – for example, when a particular model of Samsung (the Galaxy Note
7) was withdrawn due to a design error which caused a potential fire hazard with
the smartphones);25
•Facility failures (these happen when one or more components of the facility itself,
such as machines or equipment, breaks and causes parts of, or the whole facility, to
grind to a halt; an example of this failure is the failure resulting from a lightning
strike putting all the computers of a service provider out of action);
•Staff failures (these happen when mistakes are made or set procedures are not
followed – for example, when workers are not properly trained or where job
performance comes to a standstill because of strikes);
•Supplier failures (these happen when suppliers do not provide products or
services according to the agreement – for example, when supermarkets place
advertisements for special offers and the suppliers do not deliver the order on time);
and
•Customer/client failures (these occur when customers/clients use a product or
service incorrectly or do not use it for the purpose for which it was designed; an
example of this failure is the failure resulting from a customer using a 1 300 cc car to
tow a caravan that requires a car engine of at least 3 000 cc for towing).
11.6.2.2Failure detection and analysis
As failures will unfortunately and inevitably occur, operations managers should have
mechanisms in place to detect such failures, and then be able to put procedures into
operation to determine the causes of the failures. Mechanisms to detect
failures include process-monitoring, complaints and feedback questionnaires from
customers/clients. In failure analysis, techniques such as cause-effect diagrams and
analysis of customer/client complaints are used. Feedback questionnaires from clients
are especially important to detect shortcomings in the rendering of services. This is one
of the principal reasons why hotels ask their guests to fill in forms on the quality of their
service.
11.6.2.3Systems-reliability improvement
When there is clarity about the causes and consequences of failures, operations
managers should endeavour to prevent them in the first place. This will increase the
reliability of the entire operations process. This can be done by redesigning the
products and services, or the processes that manufacture or provide them, or by
implementing regular maintenance and repairs. In the case of failures that still do occur,
additional back-up systems or components can be used. It may also be necessary to
launch a training or motivation programme for the staff.
11.6.2.4Recovery of failures
Operations managers attempt to reduce the occurrence of failures and the results
thereof by means of failure detection and analysis, and systems-reliability
improvement. However, when failures still occur, recovery procedures and
contingency plans should already have been devised and put in place to minimise the
potential detrimental effects on customers/clients.
11.6.3Total quality management
The concept of total quality management (TQM) appears above in the discussion of the
quality-planning and control activities of operations management (Section 11.5.4). It
was also stated that these days, the quality of products or services is not regarded as the
responsibility of the operations manager alone. The concept of TQM is far wider, hence
the entire business is responsible.
11.6.3.1Defining total quality management
Total quality management (TQM) may be defined as a management philosophy that
primarily aims to satisfy the needs and expectations of customers/clients by means of
high-quality products or services, and that endeavours to shift the responsibility for
quality from the operations-management function to the entire business (that is, all
other functional management areas and the employees therein). TQM is further
primarily aimed at:26
•meeting the needs and expectations of customers/clients;
•covering all parts of the business, regardless of how small or seemingly
insignificant they are;
•making each and every employee in the business quality conscious, and holding
him or her responsible for his or her contribution to the achievement of TQM;
•identifying and accounting for all costs of quality (both prevention and failure
costs);
•doing things right the first time (proactive rather than reactive action);
•developing and implementing systems and procedures for quality and the
improvement thereof; and
•establishing a continuous process for improvement.
The concept of TQM did not develop overnight. Many so-called ‘quality gurus’, such as A.
Feigenbaum, W.E. Deming, J.M. Juran, K. Ishikawa, G. Taguchi and P.B. Crosby,
contributed to what has today become known as TQM.
According to J.S. Oakland’s TQM model (see Figure 11.11), the focal point of total
quality is the underlying processes that occur at each customer/client and supplier
interface. To this should be added specific hard-management components (quality
systems, techniques and methods, and teams) and soft-management (or human)
components (commitment, communication and culture).
Figure 11.11: Total quality management model
Source: Republished with permission of Taylor & Francis Informa UK Ltd from Oakland, J.S. 2003. Total
quality management. Third edition, Oxford : Butterworth-Heinemann, p. 21. Permission conveyed through
Copyright Clearance Center, Inc.
11.6.3.2The ISO/SANS 9001:2015 quality management system
The South African Bureau of Standards (SABS)27 is considered the leading African
standardisation body for the social and economic benefit of South Africa in the global
economy for ‘achieving higher product quality and integration of the different business
functions; overall efficiency in business and promotion of service excellence in the
various sectors of the economy; enhance competitiveness among organisations in local
and international markets; and support of government imperatives to grow business
process services’. It believes the quality management principles around which a quality
standard should be developed include ‘customer focus, leadership, evidence-based
decision-making, relationship management, engagement of people, process approach
and improvement.’ A standard for quality management that is used throughout the
world to lay down the requirements for a quality-management system is the ISO 9000
series. This series provides comprehensive recommendations as to how a qualitymanagement system should be compiled for a particular type of business whether it be
for manufacturing and/or service businesses.
The ISO 9001:2015 document28 sets out the requirements under ten headings:
scope, normative references, terms and definitions, context of the organisation,
leadership, planning, support, operations, performance and improvement. The first
three clauses provide the scope and context of the quality management system for the
business. The remaining seven clauses are aligned to the well-known PDCA
management improvement cycle (Plan, Do, Check and Act) where leadership, within the
context of the organisation, planning and support form the basis of the PLAN; the
operation - the DO; performance evaluation - the CHECK; and last, improvement - the
ACT. Note: the new standard places a lot of emphasis on risk-based thinking whereby
formal risk analysis is used to identify and manage the challenges of the business
processes.
11.6.3.3The implementation of total quality management
The way in which TQM is implemented in a business determines how successful this
application will be. Factors that should be taken into account are listed below, 29 along
with bracketed terms referring to management components of Oakland’s TQM
model30 (see Figure 11.11):
•Integration of TQM in the overall business strategy (systems)
•Top management and employees’ support and involvement (commitment)
•Teamwork in the improvement initiatives (teams)
•Feedback on quality successes that have, in fact, been achieved (communication)
•Creation of quality awareness (culture)
•Training of employees in quality techniques and methods (techniques/methods).
Oakland revised his model in 2003. In this revised model, he referred to the four Ps
(hard components) and three Cs (soft components) of TQM.31 While the ‘soft’
components of the earlier model remain the same, the new ‘hard’ components are
processes (systems), people (teamwork) and planning (techniques/methods), which
are all linked to performance.
11.7Summary
This chapter provided a broad overview of the important aspects covered in the subdiscipline of operations management. It examined the nature of operations management
and introduced a general model of which all components were discussed in more detail.
The classification of different process types for manufacturers (goods or product
producers) and service providers was also illustrated.
Thereafter, the chapter examined in more detail three of the activities of operations
managers: design, planning and control, and improvement. Operations design is
concerned with the design of products or services that will satisfy the needs of
customers/clients and the design of operational processes to manufacture or provide
them. Once the design activities have been completed, the operations process must be
put into action by means of operation planning and control. Specific responsibilities in
this regard include capacity planning and control, inventory and purchasing planning
and control, and quality planning and control. Once these activities have been executed,
the operations manager should consider how to improve the operation. Operations
improvement involves both improving the reliability of the entire operations process on
a continuous basis by failure prevention and recovery, and improving the entire
business by applying the concept of TQM so that quality products or services can be
manufactured or provided to satisfy customers’/clients’ needs optimally.
Small business perspective
With reference to the case study in the beginning of the chapter, Noise Clipper (Pty) Ltd was
awarded the AHI Business of the Year award after the business (a typical SME) successfully
responded to a global noise control problem. They entered the OHS (occupational health
and safety) market with a bold vision. The small company started with 10 employees in
Pretoria, and their vision to address the need for quality hearing protection for thousands of
people has worked to their advantage. Although the four owners (the entrepreneurs)
commenced very conservatively (without debt), and as part-time employees, they did a few
strategically correct things in terms of patent registration, Department of Labour (see
footnote, page 412) approval, SABS tests and CSIR tests. As turnover slowly increased they
moved to a more professional environment with networking advantages: between the
Innovation Hub and the CSIR in Pretoria. They regard operations management as the heart
of the organisation, even for their marketing campaign. Innovation is an inherent business
value and they believe technology can be developed if it is difficult to obtain. They associate
innovation with ‘re-creation’, ‘adaptation’, ‘imitation’ and ‘invention’. Their belief is to innovate
or stagnate, which implies creativity and change.
Noise Clipper strategically positioned itself to design and develop their own products and
process technologies (machines) to assist their manufacturing and service delivery
processes. They patented their own hearing protection device (HPD), which has a unique
tamperproof filter mechanism. After a market development phase lasting a few years, sales
increased when large mining groups started pilot studies (small batch orders for testing).
This led to a few breakthroughs, including large orders from platinum mines. As the business
grew, Noise Clipper continued their research and extended their product range in
collaboration with known international brands. This co-branding strategy was a huge
success, and orders from factories and mines grew. Because the product is custom-made it
involves a service that can be extended. They offered a servicing contract to maintain (clean,
calibrate, recover, etc.) the HPD. This led to developing and subsequently offering the
hearing conservation programme (HCP). Noise Clipper could therefore diversify in terms of
providing a professional HCP service to complement its product. They benchmarked against
a programme awarded ‘Best Practice’ by the European Agency for Safety and Health at
Work (EU-OSHA). The model has been adopted (and adapted) in many mining operations in
South Africa and other manufacturers worldwide. Noise Clipper is therefore a good example
of servitisation in terms of the importance of both the product package and the service
package. It is also a very good example of a South African small business that has become
a prominent market leader with international partners.
KEY TERMS
approaches to improvement
operations design (process desig
batch operation/process
operations improvement
capacity planning and control
operations objectives
competitive advantage of good design
operations planning and control
composition of products and services
operations processes
continuous operation/process
operations strategy
customers/clients
outputs
design of products/services (product or service design)
performance standards
design of supply network
priorities for improvement
failure prevention and recovery
process technology
flexibility
process types
inputs
productivity
inventory and supply chain planning and control
project operation/process
ISO/SANS 9000:2015 quality management system
quality
jobbing operation/process
quality planning and control
job design and work organisation
reliability
layout and flow
stages of products or service des
lead time
Total Quality Management (TQM
mass operation/process
transformation
Questions for discussion
Reread the Noise Clipper case study on page 313 and answer the following five
questions:
1.Factories and mining operations are noisy and environmentalists and
governments seek solutions for noise pollution and the resultant noise-induced
hearing loss (NIHL). Do you agree with the argument that operational noise (above
the legal limit) is harmful to productivity (e.g. noise detrimentally affecting
demanding tasks) as well as for personal health? Should noise pollution be a major
concern worldwide if more workers are being exposed to more potentially
dangerous noise levels than to similar levels of any other noxious agent? What is
meant by the insidious nature of NIHL?
2.Many operations have a noise challenge. Noise has become a generic hazard
common to the extraction of all commodities. The highest noise exposure (from
100 dB and above) comes from plant and equipment, associated with loaders, longwall shearers, chain conveyors, fans and pneumatic percussion tools. Should
management have a different approach, such as a unique HCP, for mine workers?
3.Hearing conservation is a challenging science. A huge effort should be made to
obtain an effective HCP. Signal detection, signal localisation and speech
discrimination (speech intelligibility) are crucial aspects of fitness for duty and
productivity. Which fundamental principles will you apply if you had to describe
(or design) an effective HCP?
4.Noise Clipper strategically positioned itself to design and develop its own
products and process technologies (machines) to assist its manufacturing and
service delivery processes. Which were the specific categories of innovation that
the company achieved?
5.The Noise Clipper HPD is personalised and tailor-made for attenuation, comfort
and pride. These dimensions are regarded as important for user-friendliness and
wearability. List the other product characteristics and relate them to ownership of,
and pride in, the product.
Multiple-choice questions
1.An effective and efficient operation can give a business many advantages. Which
of the following is not one of these advantages?
a.It can reduce the costs of making the products or offering the services.
b.It can reduce the amount of investment (capital employed) needed to
manufacture the type and quantity of products or offer the service required.
c.It can be decisive for the general reputation of the business unless the
customer/client is not regarded as the focal point in operations management.
d.It can improve productivity and it can help a business to satisfy the needs of
its customers/clients more effectively.
2.For the purposes of quality planning and control, it is necessary to define certain
quality characteristics that relate directly to the design specifications for products
or services. Which quality characteristic is not often used?
a.Performance ability
bReliability (continuous performance capability)
c.Durability (total life expectancy)
d.Limited customer contact (for the convenience of privacy)
3.Which of the following is not an input in the transformation process?
a.Information
b.Products
c.Technology
d.Customers/Clients
4.What factors need to be taken into account to successfully implement TQM?
i.Top management’s and employees’ support and involvement (commitment)
ii.Teamwork in the improvement initiatives (teams)
iii.Feedback on quality successes that have, in fact, been achieved
(communication)
iv.Creation of quality awareness (culture)
a.i
b.ii,iii
c.ii, iv
d.all of the above
5.___________ failures happen when mistakes are made or set procedures are not
followed.
a.Design
b.Facility
c.Supplier
d.Staff
References
1.Slack, N., Brandon-Jones, A. & Johnston, R. 2016. Operations management. Eighth
edition. London: Pearson, pp. 47–49.
2.Ibid., p. 6.
3.Ibid., p. 30.
4.Knod, E.M. (Jr) & Schonberger, R.J. 2001. Meeting customers’ demands. Seventh
edition. New York: McGraw-Hill, pp. 17–18.
5.Airports Company South Africa. On-time performance. 2019. Available
at http://www.airports.co.za/business/statistics/on-time-performance.
6.Krajewski, L.J. & Ritzman, L.P. 1993. Operations management. Third edition. New
Jersey: Pearson, p. 5.
7.Slack, N., Brandon-Jones, A. & Johnston, R. 2016. Operations management. Eighth
edition. London: Pearson, pp. 22–27.
8.South African Market Insights. Education Statistics. 2019. Available
at https://www.southafricanmi.com/education-statistics.html.
9.Ibid.
10.Slack, 2016. op cit., pp. 189–191.
11.Ibid., p. 192.
12.Slack, N., Brandon-Jones, A. & Johnston, R. 2013. Operations management. Seventh
edition. London: Pearson, p. 130.
13.Davis, M.M. & Heineke, J. 2005. Operations management: Integrating manufacturing
and services. Fifth edition. New York: McGraw-Hill, p. 11.
14.Slack, N., Brandon-Jones, A. & Johnston, R. 2016. Operations management. Eighth
edition. London: Pearson, pp. 122–123.
15.Ibid., pp. 141–145.
16.Krajewski, L.J. & Ritzman, L.P. 2005. Operations management: Processes and value
chains. Seventh edition. Upper Saddle River, New Jersey: Pearson, pp. 302–303.
17.Krüger, L.P. 2000. The changing role of production and operations management:
Moving towards the ultimate in robotic manufacturing and service provision.
Unpublished inaugural lecture. Pretoria: University of South Africa, p. 21.
18.Slack, N., Brandon-Jones, A. & Johnston, R. 2016. Operations management. Eighth
edition. London: Pearson, p. 289.
19.Ibid., pp. 327–339.
20.Ibid., p. 351.
21.Knod, E.M. (Jr) & Schonberger, R.J. 2001. Operations management: Meeting
customers’ demands. Seventh edition. New York: McGraw-Hill, pp. 138–140.
22.Slack, N., Brandon-Jones, A. & Johnston, R. 2016. Operations management. Eighth
edition. London: Pearson, pp. 573.
23.Ibid., p. 500.
24.Slack, N., Brandon-Jones, A. & Johnston, R. 2013. Operations management. Seventh
edition. London: Pearson, p. 472.
25.Moynihan, T. n.d. Samsung finally reveals why the Note 7 kept exploding. Available
at https://www.wired.com/2017/01/why-the-samsung-galaxy-note-7-keptexploding/.
26.Slack, N., Brandon-Jones, A. & Johnston, R. 2016. Operations management. Eighth
edition. London: Pearson, p. 587–591.
27.South African Bureau of Standards (SABS). ISO/SANS 9001:2015 Quality
Management Systems. Available at https://www.sabs.co.za/TrainingAcademy/docs/SABS_ISO9001brochureA5.pdf [Accessed 18 September 2018], p. 23.
28.South African Bureau of Standards. 2015. ISO 9001:2015 Quality management
systems — Requirements. Fifth edition. Pretoria: South African Bureau of Standards.
29.Slack, N., Chambers, S. & Johnston, R. 2007. Operations management. Fifth edition.
London: Pearson, pp. 663–665.
30.Oakland, J.S. 2000. Total quality management: Text with cases. Second edition.
Oxford: Butterworth-Heinemann, pp. 81–91.
31.Ibid., pp. 26–27.
CHAPTER 12
Human resource management
and the South African labour
legislative framework
Barney Erasmus
The purpose of this chapter
The purpose of this chapter is to introduce the issues relating to the management of human
resources within an organisation, to explain the theories on the motivation of human
resources and to provide an overview of the most important labour legislation that has an
impact on the workplace.
Learning outcomes
On completion of this chapter you should be able to:
•describe the basic steps involved in human resource planning
•explain how companies use recruiting to find qualified job applicants
•describe the selection techniques and procedures that companies use when deciding
which applicants should receive job offers
•describe how to determine training needs and select the appropriate training methods
•discuss how to use performance appraisal to give meaningful performance feedback
•describe basic compensation strategies and how they affect human resource practice
•describe the role of the human resource function in organisations
•explain the contribution human resource management can make to the effectiveness of
an organisation
•provide an outline of who is responsible for human resource management
•list and explain the different content theories of motivation
•discuss the process theories of motivation
•evaluate the different motivation strategies
•understand the importance of the Constitution of the Republic of South Africa, 1996
•describe the impact of the following acts on the management of human resources in
organisations:
»The Labour Relations Act (No. 66 of 1995)
»The Basic Conditions of Employment Act (No. 75 of 1997)
»The Skills Development Act (No. 97 of 1998)
»The Skills Development Levies Act (No. 9 of 1999)
»The National Qualifications Act (No. 67 of 2008)
»The Employment Equity Act (No. 55 of 1998)
»The Occupational Health and Safety Act (No. 85 of 1993)
»The Compensation for Occupational Injuries and Diseases Act (No. 130 of 1993)
»The Unemployment Insurance Act (No. 63 of 2001).
CASE STUDY: Baden Aniline and Soda Factory (BASF): Setting our sights on the
future
The company Badische Anilin- und Soda-Fabrik (German for Baden Aniline and Soda
Factory) create chemistry – and have been doing so for more than 150 years. Their portfolio
ranges from chemicals, industrial solutions, performance materials, nutrition and care as well
as surface technologies to agricultural solutions. As the world’s leading chemical company,
they combine economic success with environmental protection and social responsibility.
Through science and innovation, they enable their customers in every industry to meet the
current and future needs of society. They have summed up this contribution in their
corporate purpose: ‘We create chemistry for a sustainable future’. Every day, their
employees work on developing innovative solutions for customers around the world. Their
people’s passion, imagination, and determination are crucial to their success as a market
leader. Although they employ over 114 000 people throughout the company, they dedicate
themselves to supporting and empowering each individual in finding the right path to their
success.
Best-in-class performers
BASF’s employees are fundamental to achieving the goals of their strategy. They focus on
three strategic directions: people empowerment, differentiated approach for better decisionmaking and inclusive leadership. Career development, life-long learning, the support and
development of their leaders as well as the inclusion of diversity are cornerstones of their
human resource management.
Employee development and learning
At BASF, they want their employees to make the most of their talents and their job – and
they offer many ways to do that including a global framework for development of all
employees. They provide employees with interesting and challenging learning opportunities.
BASF is a well-known talent developer worldwide because of the broad range of challenging
assignments, trainings, career patterns, and the opportunity for cross-organisational moves.
Employee development
Every BASF employee is expected and invited to actively shape their own development. To
support this, they offer a structured process and tools via their Employee Development
approach. When they support their employees in reaching their potential and aspirations, it
helps the company build a modern, high-performing and customer-centric organisation, and
encourages all BASF employees to find creative solutions for our customers.
Lifelong learning
BASF provides a multitude of learning opportunities, from classroom-based to learning on
the job. For employees, lifelong learning means development not just for now but also for the
future. Their various learning offers enable employees to optimise performance and realise
their potential in every stage of their career.
Diversity
In order to address the various demands of their customers and markets, BASF relies on
their diverse and agile teams in all areas and functions around the globe. The inclusion of
diversity is an important component of their strategic human resources management. It helps
the company to continuously improve their teams’ performance, power of innovation, and
increases creativity, motivation and identification with the company. For BASF, Diversity +
Inclusion is one of the essential keys to business su